Solicitor Ed Williams, in our Commercial Property & Planning team, explains what an Authorised Guarantee Agreement ("AGA") in Commercial Property is.
When a tenant seeks to assign (transfer) its lease to a new tenant, the landlord will often require the outgoing tenant (assignor) to enter into an Authorised Guarantee Agreement (“AGA”). An AGA is a formal legal document under which the assignor guarantees that the incoming tenant (the assignee) will comply with the tenant covenants in the lease. This guarantee usually covers obligations such as paying rent, keeping the premises in repair, and complying with all other terms of the lease.
AGAs are a relatively standard part of many lease assignment transactions but will not always be appropriate. It is therefore important you take advice on when they are needed.
How does an AGA fit in the Assignment Process?
Once the landlord has agreed in principle to the assignment of the existing lease, their solicitor will prepare the Licence to Assign. This Licence is then negotiated between the landlord, assignor and assignee.
Alongside the Licence to Assign, the landlord’s solicitor will prepare the AGA. The AGA is usually negotiated between the landlord and the assignor, as it sets out the assignor’s continuing obligations after the assignment. After documentation is agreed, completion of the AGA will generally take place at the same time as the Licence to Assign.
Keys terms
When negotiating an AGA, the following issues should be considered:
- Extent of liability: whether the assignor will be required to take a new lease of the premises upon the assignee’s default, and whether the assignor will be fully responsible for all tenant covenants or only specific obligations.
- Whether an AGA is appropriate: the landlord might consider whether negotiating a new lease might be more appropriate than an assignment of the existing lease. If so, an AGA would not be necessary.
- Whether an AGA is useful to the landlord: an AGA is only as strong as the financial standing of the assignor. If the assignor doesn’t have the means to guarantee the obligations of the assignee, the value of the AGA would be limited.
- The financial standing of the assignee: the assignor should consider the financial strength and reliability of the assignee. If the assignee defaults, the assignor may be required to ‘step in’, which would possibly undermine the purpose of assigning the lease in the first place.
- Additional security requirements: the landlord could in addition to the AGA, ask the assignee to provide a rent deposit or a guarantor (separate to the AGA).
Conclusion
A well-drafted AGA protects the landlord’s position on assignment and confirms the rights and obligations that the assignor has after the assignment takes place. Given the complexities and ongoing obligations involved, we always recommend that parties seeks specialist legal advice before entering into an AGA.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
