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

The legal framework behind authorised guarantee agreements in the UK

When a tenant hands their lease to someone else, they are normally released from it. The landlord does not have to allow this without protection, though. As a condition of agreeing to the handover, the landlord can ask the outgoing tenant to guarantee the new one, much like a guarantor on a rented flat.

This arrangement is called an authorised guarantee agreement, and it comes from the Landlord and Tenant (Covenants) Act 1995. If the new tenant stops paying rent or breaks the terms of the lease, the landlord can hold the outgoing tenant liable instead.

The key point is that this only lasts while that one tenant holds the lease. As soon as they pass it on to someone else, the outgoing tenant's responsibility ends. It never extends to tenants further down the line.

When is an authorised guarantee agreement required?

Whether a landlord requires an AGA depends on the terms of the lease. Most commercial leases let the landlord make an AGA a condition of agreeing to the assignment. This is most likely when:

• The new tenant is less financially secure than the outgoing one.
• A landlord is paying closer attention to a tenant's financial strength in a difficult market.

We must stress that a landlord cannot demand an AGA unreasonably. If the new tenant is clearly more creditworthy than the outgoing one, for example, insisting on an AGA may be open to challenge. It is worth getting specialist advice on this before agreeing to anything.

A practical authorised guarantee agreement example

Here is a straightforward authorised guarantee agreement example. Imagine a company holds a ten-year lease on an office and, halfway through the term, assigns it to another business as part of a restructure.

1. The landlord agrees to the assignment, on the condition that the outgoing company signs an AGA.
2. Six months later, the new tenant runs into financial trouble and stops paying rent.
3. Under the AGA, the landlord requires the outgoing company to cover the arrears, and it has to pay.
4. The outgoing company can then try to recover that money from the new tenant.

This is why it pays to understand the risk before agreeing to an assignment. A business that assigns its lease without taking advice can end up paying for a property it no longer occupies.

The guarantor's position and authorised guarantee agreement insurance

Guarantors in AGA agreements

If the lease has a personal or corporate guarantor, they can be asked to back the AGA too, standing behind the outgoing tenant's obligations. This is easy to miss in negotiations, so any guarantor in an authorised guarantee agreement arrangement should be clear about exactly what they are taking on.

Insurance in AGA agreements

Businesses worried about this risk can take out authorised guarantee agreement insurance. A policy like this protects the outgoing tenant, or their guarantor, against the cost of a claim if the new tenant defaults. It is not right for every deal, but on larger leases, or where there are doubts about the new tenant's finances, it is worth looking into.

What to do before entering into an authorised guarantee agreement

As soon as an AGA is raised as a condition of assignment, the outgoing tenant should seek professional advice. The terms need to be carefully reviewed to ensure they understand what the AGA covers, how long it lasts, and when the landlord can call on it. An AGA that is poorly negotiated or misunderstood can leave a business carrying a liability for years, affecting its finances and its ability to do future deals.

Equally, landlords have just as much reason to take care. If you own a commercial property, an AGA only protects you if it is properly drafted and enforceable. A poorly drafted one may fail at the very moment it is needed.

Speak to our lease advisory team about an AGA today

Our lease advisory specialists help landlords, tenants, and assignees with all aspects of commercial lease transactions, including the negotiation and review of authorised guarantee agreements.

We have more than 180 years of experience in the property industry, a proven track record of success, and consistently receive positive reviews from past clients. Plus, we will develop a tailored plan to ensure your specific needs are met.

Whether you are facing an assignment, reviewing your obligations, or seeking clarity on a guarantee you have already entered, call 0330 191 8107, email [email protected], or complete the contact form below to arrange a consultation.