2020/NO.51 - The Authorised Guarantee Agreement (AGA) was created in 1995 in the Landlord and Tenant (Covenants) Act. But how did it come about in the first place and why is it so important if you are taking on a new lease ?
Before the legislation in 1995 the first (new) tenant of a lease would remain liable for covenant performance throughout the entire term of the lease regardless of who owned the lease in subsequent years. This was known as ‘Privity of Contract’. The areas of concern were the payment of rent and the keeping in good repair and decorative condition. If a new tenant way down the line did a runner and the building was in disrepair and rent had not been paid, the responsibility could come back all the way down the assignment trail to the first lease signatory.
For landlords the situation was also of concern. They for sure did the due diligence test on the new (first) tenant but could find themselves with far less control on subsequent assignees. And so the new act came into being to balance the liability of the outgoing tenant and to protect the landlord.
The AGA allows the outgoing tenant to provide a guarantee of the lease performance of the direct assignee. This guarantee lasts until either another tenant enters the fray or the lease comes to an end. Curiously a standard AGA was not intended to be routinely entered into on every lease assignment. Then came along the Code for Leasing Business Premises in England and Wales 2007 which only recommended asking for an AGA at the date of assignment BUT ONLY if the assignee is registered overseas or of lower financial standing than his predecessor. The Code then recommended with smaller corporate tenants a better option than an AGA was to secure a hefty rental deposit. But things have changed yet again in the latest version of the Code published in February 2020. It is now suggested that the provision of an AGA is only necessary when REQUIRED by the Landlord. So where do we stand in the teeth of the pandemic ?
Given the unprecedented economic times both Landlords and Tenants are now having to think long and hard about how and when they agree to give or rely on an AGA. When an existing tenant files for bankruptcy the previous tenant may be obliged under an AGA to take a new lease out for the property. Previous obligations must be taken seriously linked with the test of reasonableness under the recommendations of the Code.. You could agree with your landlord that the AGA should be time limited .
From a landlord’s point of view they are only looking at covenant strength. That is why they become nervous if your assignment is to a group company. Subsequent inter company movements in land holdings can severely dilute covenant strength.. Due to the strict anti avoidance provisions of the 1995 Act it only takes one inter company assignment to release the parent company from liability. Both tenants and landlords are seriously questioning the value of providing an AGA or even of taking the responsibility of entering into such an agreement. There are many ways of structuring lease assignments, not least the securing of more substantial rent deposit. Needless to say this very grey area of the law needs careful legal consideration and advice.
For our part we firmly recommend that it is an essential point to cover for every Tenant on any proposed new lease or lease assignment. Take advice, negotiate…and then negotiate still further with the backing of the 2020 Code for Leasing of Business Premises.