Going GAGA over AGAs: A quick guide to authorised guarantee agreements
I have been meaning to get this off my chest for years. I hate AGAs and I just do not see the point in them. Let me explain.
Authorised guarantee agreements (“AGAs”) were introduced by the Landlord and Tenant (Covenants) Act 1995 (“LTA 1995”) as a sop to landlords following the changes that had been made.
Under “old” leases (granted pre-1996) the tenant remained liable for breaches of the lease by subsequent assignees. This was a particular issue where leases had historically been on longer terms. You forgot about the assignment you completed 10 years ago of 30 year lease you took in 1995? Well, the landlord did not and now they now come knocking at your door for payment as the current tenant has failed to pay and you are still on the hook.
The LTA1995 Act changed this. Tenants are now automatically released from liability under the lease on a lawful assignment… unless they have entered into an AGA.
The LTA 1995 does not define what an AGA is but just sets out what it must not do and the conditions around it. The effect is that the former tenant guarantees the obligations of the new tenant and is liable to the landlord for any breach. The only real difference compared to an “old” lease is that the original tenant is only liable for breaches by the first assignee but not on any future assignments. So if Lady Gaga assigns her lease to Katy Perry who then assigns the lease to Taylor Swift, Lady Gaga is only guaranteeing Katy but not Taylor. Given the average length of leases, how likely is it that there will be two or more assignments during the term of the lease to make this relevant?
Do tenants have to enter into AGAs?
Almost certainly. Leases normally provide that the tenant must provide an AGA on assignment or “if reasonably required” by the landlord. In practice, how often is the landlord not going to ask for an AGA? Will a tenant, keen to assign the lease, argue that the landlord is being unreasonable if an AGA is required but they do not want to give one?
Just to complicate matters, any guarantor of the tenant assigning the lease will also be required to provide a guarantee of the obligations of that tenant under the AGA. This is known as a “GAGA”. This is technically a sub-guarantee; a guarantor cannot itself provide an AGA in respect of a new tenant’s obligations as this falls foul of the anti-avoidance provisions in the LTA 1995.
This all gets more complicated where guarantors want to give a repeat guarantee for example group companies assigning a lease intra-group with the same parent company wanting to guarantee those obligations. Throw in the risk of accidentally releasing a guarantor from its obligation and you have to ask yourself, is all this effort really needed?
The solution is simple.
Stop going GAGA over AGAs and do not take either. If a tenant, say no to both in the lease.
If the new tenant does not look as financially strong as the outgoing tenant, the landlord should simply ask for a rent deposit instead. If the tenant defaults, the landlord takes money from the rent deposit. It does not have to chase someone who has no current involvement in the lease or the current tenant.
For specific advice on authorised guarantee agreements, or if you have questions about any other commercial property issues, please contact James Letchford on 020 7412 0050 or firstname.lastname@example.org.