As a commercial tenant, it's important to know what an Authorised Guarantee Agreement (AGA) involves to protect yourself from future financial headaches.
Many believe that selling a commercial lease releases them from their obligations. However, it is not uncommon for the lease to require the outgoing tenant to sign an Authorised Guarantee Agreement if the lease is sold to a third party.
In this article, we'll break down AGAs, explore their implications, and offer savvy negotiation tips to empower you in lease discussions.
What is an Authorised Guarantee Agreement (AGA)?
An Authorised Guarantee Agreement (AGA) is a legal document used in commercial lease transfers. They aim to balance the uncertainty of a tenant's liability when assigning a lease with the landlord's need for protection if the new tenant isn't satisfactory.
When you rent a commercial space, you agree to certain responsibilities, like paying rent and maintaining the property. If you decide to transfer your lease to someone else, the AGA kicks in. It means you're still responsible for those lease promises, even after the transfer. This could involve paying for repairs or covering rent if the new tenant doesn't meet their obligations.
Signing an Authorised Guarantee Agreement as the outgoing tenant means you act as a guarantor for the new tenant to whom you're assigning your lease. This means you guarantee that the new tenant will follow the lease terms and make payments.
If the new tenant fails to pay rent, breaches the lease terms, or rejects the lease for any reason, you may be on the hook for any outstanding payments and obligations until the lease ends.
Additionally, an AGA gives a landlord the choice to require the outgoing tenant to take on a new lease, with the same terms as the existing one, if the new tenant defaults and the current lease is terminated.
Do I have to agree to an AGA?
If a commercial lease has a strict rule against assignment, the landlord can always require an AGA.
If there's a flexible rule against assignment, where the tenant needs the landlord's approval to assign, the landlord can only demand an AGA if it's explicitly stated as a condition for approval.
If the landlord hasn't explicitly stated an AGA as a condition, they can still require one if it's reasonable to do so.
When is an AGA required?
Although an AGA isn't always necessary, landlords might request one right from the start of a commercial lease to safeguard their business interests.
However, the Code for Leasing Business Premises in England and Wales 2007 guides when landlords should ask for an AGA.
According to the code, landlords should only request an Authorised Guarantee Agreement if the new tenant (known as the assignee) has a weaker financial status than the outgoing tenant, or if they're based overseas.
For smaller tenants, the code suggests landlords consider taking a rent deposit from the new tenant instead of requiring an AGA from the outgoing tenant. This offers another way to protect the landlord's interests, especially when dealing with tenants with limited finances or those located abroad.
In some circumstances, tenants may be able to negotiate the inclusion of a clause in the lease stating that an AGA will only be needed if it's "reasonable in the circumstances" at the time of assignment. Without this, landlords might insist on an AGA even if the Assignee is financially stronger than the outgoing tenant.
What are outgoing tenants liable for under an AGA?
Liability under an AGA depends on what it expressly states unless there are statutory limits.
Ultimately, the outgoing tenant might have to pay rent arrears, service charges, or perform any duties the new tenant fails to do. It's also possible the outgoing tenant may have to take on a new lease if the new tenant goes bankrupt and the lease is rejected.
If an outgoing tenant is required to pay a fixed charge, the landlord must send them a default notice within six months of the payment becoming due for them to be liable.
What are the implications of Authorised Guarantee Agreements?
An Authorised Guarantee Agreement has serious legal and financial consequences for everyone involved.
One big implication is that the original tenant is still legally responsible for the lease obligations even after passing it to a new tenant. If the new tenant doesn't meet their lease duties, the landlord can legally ask the original tenant to fix the problem or pay up.
For instance, under an AGA, you might have to cover unpaid rent or other costs if your tenant falls into arrears. This has the potential to put a lasting financial strain on you, affecting your financial stability. It could also make it harder to secure a commercial lease in the future, as landlords might see you as a risk.
Therefore, tenants need to know how long they're liable under an AGA to understand and limit their liability period. Some AGAs have fixed terms, while others last until the lease ends.
For business leases with security of tenure, the outgoing tenant should be aware that the AGA might extend beyond the lease's contractual term if it covers any "holding over" period. To avoid uncertainty, the tenant should be sure the AGA doesn't cover any holding over period, so they can be sure when their liability ends.
What can make an AGA invalid?
An AGA might be deemed invalid in certain situations, such as:
The agreement does not follow the rules laid out in the Landlord and Tenant (Covenants) Act 1995;
The terms of the agreement are unfair, especially if they heavily favour one party;
The AGA is entered into based on misrepresentation or under duress (coercion or pressure);
The agreement goes against public policy or legal principles;
The agreement wasn't made with the required formalities like being written and signed by everyone involved;
The AGA is used for illegal purposes or involves unlawful activities.
By law, an AGA can't impose more liability on the outgoing tenant than what's in the lease.
Getting legal advice from a commercial property solicitor can help you steer clear of these risks and ensure that, as a tenant, you're only agreeing to what's lawful and necessary.
How long does an Authorised Guarantee Agreement last?
There's no set time frame dictated by law for an AGA. Instead, the duration can be negotiated between the parties involved, and tenants may be able to set a time limit on their liability under an AGA.
The landlord and original tenant can decide how long the AGA will last. Typically, it covers the rest of the lease term from when the outgoing tenant sells their lease to the Assignee, or until the Assignee sells it to another party, whichever happens first.
However long the agreed period is, the details should be clearly stated in the lease documents to prevent any confusion or disputes later on.
When are tenants released from their obligations under an AGA?
Tenants are freed from their lease obligations when the lease ends or when the lease is assigned unless it's a breach.
The same rules apply to AGAs as to guarantees and sureties. A guarantor can be released if the lease changes harm the tenant, the landlord grants concessions, part of the lease is surrendered, or a co-guarantor is released.
If the landlord and assignee make significant lease changes affecting ownership, it's considered a lease surrender and re-grant, releasing the guarantor from liability under the AGA.
The role of AGAs when negotiating heads of terms
Before a formal lease is drawn up and signed, the heads of terms, also known as a letter of intent or memorandum of understanding, lay out the main commercial responsibilities. At this stage, an AGA becomes an important topic for discussion.
During negotiations, parties agree on key aspects like rent, lease duration, and other main terms. They also discuss whether the lease can be transferred and, if so, under what conditions. If the landlord wants extra protection in case of a transfer, they might bring up the possibility of an AGA.
This negotiation phase allows tenants to propose alternatives to AGAs, such as paying a deposit. This gives both parties a chance to find a solution that suits them. Regardless of the outcome, the heads of terms should clearly outline the tenant's responsibilities if they transfer the lease, whether through an AGA or another agreed-upon method.
What precautions should outgoing tenants take before entering into an AGA?
Before entering into an AGA, outgoing tenants should first check if the landlord can automatically require them to do so. If not, it is a good idea to be sure the request for an AGA is reasonable.
Further to this, outgoing tenants should:
Make sure the AGA doesn't extend their liability beyond the lease term;
Seek assurances from the new tenant that they will not breach the list.
If a landlord asks an outgoing tenant to fulfill their AGA obligations, they should first check if there have been lease changes, as this may release them from their obligations.
Top tips for negotiating lease terms
Negotiating your lease terms can greatly impact your business success. Here are some handy tips to help you get the best deal:
Understand your business needs and goals to make sure the lease fits your operational requirements;
Carefully review the heads of term, including rent, lease duration, and any special conditions;
Look at the lease length and break clauses, which allow early termination if needed;
Discuss a rent structure that fits your budget and future business growth plans;
Ensure repair and maintenance responsibilities are fair and reasonable;
Negotiate terms for assigning or subletting the lease;
Explore alternatives to AGAs and negotiate fair arrangements;
Check service charges and other costs, including potential changes over time;
Conduct thorough property checks, including surveys and inspections;
Document everything in writing to avoid misunderstandings.
Successful negotiations should aim to strike a balance between your needs and the landlords. Negotiating favourable terms upfront can greatly benefit you and your business in the long run.
For personalised help in negotiating a commercial lease or navigating AGAs, get in touch with us today. Our commercial property solicitors offer accessible, expert advice and services for fixed fees.