Authorised guarantee agreements (AGA’s) were introduced under the Landlord and Tenant (Covenants) Act 1995 in an attempt to conciliate the potential risk to the landlord if the new tenant proves unreliable and confusion over the outgoing tenant’s liability.
Simply put, an AGA’s is a type of legally binding guarantee used to protect a landlord’s interests in cases where the tenant sells or assigns their lease to a new tenant. Effectively, AGA’s hold the assigning tenant responsible for the assignee should the latter fail to meet terms of the lease.
Landlords can only legally require a tenant to enter into an AGA if it is an expressed condition of assignment in the lease. Tenants are not legally bound to sign an AGA if the lease states that the landlord can require one “where reasonable” although tenants may choose to include one along certain terms as part of negotiating the assignment of the lease with the landlord.
AGA’s can be complicated and vary between individual lease agreements. There are certain circumstances whereby an outgoing tenant can be released from an AGA, as well as risks if tenants are unaware of their accountability when entering into an AGA. It is therefore essential that tenants fully understand the implications, risks, and potential negotiating platforms associated with AGA’s before signing any agreement to undertake one. Similarly, tenants who are already in lease agreements with AGA provisions, must ensure they appreciate their responsibilities and rights as well as circumstances which could lead to their release from the AGA.
Tenant responsibilities and risks in authorised guarantee agreements:
Signing an AGA means becoming legally obligated to take on the role of guarantor for the assignee tenant regarding whatever terms are set out in the AGA. AGA’s are not subject to a set form, so the obligations of an assigning tenant depend on what is expressly provided for in the AGA and will vary. However, there are legal parameters concerning what characteristics an AGA can and cannot have set out by the Landlord and Tenant Act 1995. Some common examples of provisions an AGA could demand of the assigning tenant include the following:
- Payment of rent
- Fulfil lease obligations if the assignee fails to do so, for example making repairs to the property, maintaining the garden, replacing fire alarm batteries etc. Obligations will vary in different leases and AGA’s
- Re-take on the lease, or take on a new lease, for the remainder of the term if the assignee falls into bankruptcy
- Any breaches of the lease
Taking on the role of guarantor puts you at risk of considerable financial costs and time commitments if the assignee proves to be unreliable, particularly if you have no legal commitment from them to meet the lease terms. Should you fail to meet your obligations under the AGA you could be charged fee’s or taken to court by the landlord to face fines or even criminal prosecution. It is therefore important that you carefully consider whether to sign a lease which includes an AGA condition or to agree to one when negotiating the assignment of a lease with the landlord. If you do agree to an AGA it is equally important that you carefully consider all of the terms and obligations it contains.
Negotiation and release from an authorised guarantee agreement:
The assigning tenant is only under the AGA for the duration that the assignee remains the tenant on the assigned lease. If the assignee were to disappear or file for bankruptcy then the assigning tenant would need to take on retake the lease. However, once the assigned lease ends or the assignee ceases to be a tenant, the assigning tenant is released from the AGA.
When the lease expires the assigning tenant is released, even if the assignee renews the lease with the landlord. The assigning tenant is also released from the AGA if the assignee in turn assigns the lease on to a new tenant except in cases where the assignment is an excluded assignment (not permitted by the landlord or lease terms). Should the landlord and assignee negotiate changes to the legal state of the lease, such as an extension of the lease duration, it would legally amount to a surrender and re-grant of the lease and so release the guarantor from the AGA.
Aside from the various ways in which a lease can be considered “ended”, there are additional conditions which would lead to the release of the assigning tenant unless expressly excluded in the AGA. The most common examples include:
- The landlord making a concession
- A surrender of part
- Alterations to the lease which could prejudice against the tenant
- In cases where there is a co-guarantor, the release of that co-guarantor can necessitate the release of the assigning tenant
Within certain legal statutes, landlords may be able to exclude possible routes to release from an AGA. It is important to try and avoid signing leases with AGA conditions and if the landlord is insistent then tenants must check specifically what is included or excluded in an AGA before signing.
When a landlord is insisting on including an AGA condition in a lease tenants should try to negotiate that the leases expressly states that an AGA can only be required in “reasonable circumstances”. Including the need for “reasonability” provides the tenant with a much stronger negotiating hand, or even legal case, should there be disputes between the parties later.
Tenants who have signed a lease with an AGA condition are sometimes able to persuade the landlord that providing an AGA is unnecessary through providing a reliable assignee. Referencing the Code for Leasing Business Premises in England and Wales 2007, tenants can cite that AGA’s should only be necessary if the assignee is less financially credible than the assigning tenant (for example having a lower income or poor credit history) or is a resident from abroad. If the assignee has equal or improved financial credibility to the outgoing tenant then it may be possible to get the landlord to accept a rent deposit from the assignee in place of an AGA.
When and why to seek legal advice:
If possible, it is advisable to avoid signing a lease which expresses AGA’s as a condition of re-assignment. This leaves you in the strongest position to refuse to sign or negotiate the terms of an AGA should you need to re-assign the lease before it ends.
If your landlord is insisting on including an AGA in the lease agreement you should seek legal advice to determine whether or not your sign as well as to help understand and potentially re-negotiate the terms of the AGA before you become legally bound.
In cases where you are looking to assign your lease and the landlord is requesting an AGA as part of the negotiations it is imperative that you take legal counsel before signing one in order to determine whether it is the best way to proceed and protect yourself from unfair terms.
Should you be in a situation where you have already signed an AGA and the landlord is requesting that you meet obligations which have not been met by the assignee, seek legal advice as soon as possible to determine whether you are liable for the specific obligation or have a case for release from the AGA.