Authorised Guarantee Agreement - what is it and how does it work?
Wed 3 January 2024
What is an Authorised Guarantee Agreement?
An Authorised Guarantee Agreement (AGA) is a form of guarantee where an existing tenant of a commercial lease agrees to guarantee the tenant’s obligations if he/she/they transfer the lease part way through.
Where the original lease provides, as is common, that the outgoing tenant must enter into the AGA, there are few options to try and negotiate.
An AGA acts as a safety net for landlords, offering an additional layer of security in case the new tenant (assignee) defaults on their lease obligations.
An AGA is a legally binding agreement between three parties:
- Assignor: The outgoing tenant who is assigning their leasehold interest to a new tenant.
- Assignee: The new tenant taking over the leasehold interest.
- Landlord: The owner of the property subject to the lease.
What happens if the original lease does not include the requirement for an AGA?
The terms of the lease , even where it is silent about an AGA, will almost certainly state that the Landlord has the right to reasonably refuse consent to an assignment of it. This means the Landlord, to protect his/her/their interest may still require the outgoing tenant to enter into an AGA guaranteeing the performance of the assignee's lease obligations.
Ultimately, whether an AGA is required as part of the negotiations on Landlord’s consent, depends on several factors, including:
- Risk assessment by the landlord - the landlord will consider the financial strength of both the assignor and assignee, the complexity of the lease, and the length of the remaining lease term.
- Negotiation between the parties- the outgoing tenant and landlord can negotiate whether an AGA is necessary and, if so, the terms of the agreement.
- Alternative Guarantees - explore alternative forms of security for the landlord, such as a rent deposit or guarantor from a third party.
Key Provisions of an AGA
- Guarantee Scope: The AGA typically guarantees all of the assignee's obligations under the lease, including payment of rent, repairs, and other covenants.
- Duration: The AGA usually lasts until the earlier of:
- The original lease term expires.
- The assignee assigns the lease to another tenant with the landlord's consent (a sub-assignment).
- Termination: The AGA may contain provisions for early termination in specific circumstances, such as the assignee becoming insolvent or bankrupt.
Risks for the Tenant
Entering into an AGA, where it might possibly be avoided (see below) can significantly impact the outgoing tenant due to ongoing and uncertain financial Liability. If the assignee breaches the lease covenants and fails to fulfil their obligations, the outgoing tenant becomes liable for damages and potentially legal fees.