Everything you need to know about authorised guarantee agreements (AGAs)

The legal framework behind authorised guarantee agreements in the UK

The authorised guarantee agreement UK regime is governed by the Landlord and Tenant (Covenants) Act 1995. Before that Act came into force, outgoing tenants under older leases could remain liable for the performance of every successor in title for the entire remaining term. The 1995 Act changed that, releasing tenants from liability on assignment, but introducing the AGA as a mechanism that allows landlords to require a guarantee from the immediate predecessor.

The critical distinction is this: under the 1995 Act, an AGA can only cover the liability of the immediate assignee. If the assignee in turn assigns the lease to a further party, the original outgoing tenant's obligations under the AGA fall away. This finite scope is one of the most important features of the regime and is central to understanding an authorised guarantee agreement and its limits.

When is an authorised guarantee agreement required?

Whether a landlord can require an AGA depends on the terms of the lease. Most well-drafted commercial leases include a clause permitting the landlord to make an AGA a condition of granting consent to assignment, particularly where the incoming tenant is of lesser financial standing than the outgoing one. In practice, landlords will commonly request an AGA as a matter of course, especially in uncertain market conditions where covenant strength is under scrutiny.

It is worth noting that the requirement for an AGA must be reasonable. Where a landlord imposes one unreasonably, for example, in circumstances where the assignee is demonstrably more creditworthy than the outgoing tenant, that condition may be challengeable. This is an area where specialist lease advisory input is valuable before any commitment is made.

A practical authorised guarantee agreement example

To make this concrete, consider a straightforward authorised guarantee agreement example. A company holds a ten-year lease on commercial office premises and, midway through the term, decides to assign the lease to another business as part of a restructuring. The landlord consents to the assignment on the condition that the outgoing company enters into an AGA. Six months after the assignment, the new occupier falls into financial difficulty and stops paying rent. The landlord serves notice on the outgoing company under the AGA, requiring it to pay the arrears. The outgoing company is obliged to do so, who then have the right of recourse against the assignee.

This example of an authorised guarantee agreement illustrates why understanding the potential exposure before agreeing to an assignment is so important. A business that assigns its lease without taking proper advice may find itself making payments it did not anticipate for a property it no longer occupies.

The guarantor's position and authorised guarantee agreement insurance

Where the lease requires a personal or corporate guarantor, that party may also be asked to guarantee the AGA itself. In other words, to stand behind the outgoing tenant's obligations under the guarantee. This is a point that is sometimes overlooked in negotiations, and the guarantor in an authorised guarantee agreement arrangement should ensure they understand the full extent of what they are being asked to underwrite.

For businesses concerned about the financial exposure an AGA creates, authorised guarantee agreement insurance is available as a risk management tool. This type of policy can protect the outgoing tenant, or their guarantor, against the cost of a claim made under the AGA in the event of the assignee's default. It is not appropriate in every situation, but for larger leases or where the assignee's covenant is a cause for concern, it is worth exploring as part of the wider transaction planning.

What to do before entering into an authorised guarantee agreement

The moment you are informed that an authorised guarantee agreement will be required as a condition of assignment, professional advice should be sought. The terms of the authorised guarantee agreement itself, including what obligations it covers, how long it runs, and the circumstances in which it can be called upon, are matters for careful review. A poorly negotiated or poorly understood authorised guarantee agreement can create a long-tail liability that affects the outgoing tenant's balance sheet and its ability to transact in the future.

Equally, if you are on the receiving end as a landlord, ensuring your authorised guarantee agreement is properly drafted and enforceable is just as important. A defective guarantee is one that may not hold up when you need it most.

Speak to our lease advisory team

BTG Eddisons' lease advisory specialists advise landlords, tenants, and assignees on all aspects of commercial lease transactions, including the negotiation and review of authorised guarantee agreements. Whether you are facing an assignment, reviewing your obligations, or seeking clarity on a guarantee you have already entered into, our team can provide the guidance you need.

Call us on 0800 051 2593, email [email protected], or complete the contact form below to arrange a consultation.