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Ongoing AGA Saga – Authorised Guarantee Agreement

If there are doubts about a tenant’s ability to pay rent, its landlord will often require a third party to guarantee the tenant’s liabilities. Before the introduction of Landlord and Tenant (Covenants) Act 1995 (the “1995 Act”), a tenant was liable to its landlord throughout the term of a lease for the defaults of any future tenants, who took an assignment of the lease. The on-going nature of this liability could be very burdensome when commercial leases typically ran for 25 years. There have been examples of hard cases in which a former tenant has had to discharge the arrears of an unknown tenant after many years and numerous assignments of the lease.

The 1995 Act greatly restricted the continuing liability of tenants and imposes a new rule that a tenant and any guarantor will be released from all future liabilities following the assignment of a lease entered into after 1 January 1996. The 1995 Act did however provide for a tenant to enter into an Authorised Guarantee Agreement (“AGA”) to guarantee the performance of an incoming tenant (but not any subsequent tenants). The 1995 Act contains anti-avoidance rules to ensure that tenants and guarantors are released from liability following the assignment of a lease.

If an outgoing tenant’s covenant is weak, a landlord will often call upon the current tenant’s guarantor to guarantee the liabilities of the incoming tenant. This practice was commonplace until 2010, when the High Court decided in the case of Good Harvest Partnership LLP v Centaur Services Ltd that this arrangement breached the anti-avoidance provisions of the 1995 Act. The Good Harvest case also called into question the practice of giving sub-guarantees, in which a guarantor guarantees the tenant’s obligations under an AGA and therefore assumes responsibility for the incoming tenant’s liabilities.

Fortunately, in April 2011, the Court of Appeal confirmed in the case of K/S Victoria Street v House of Fraser (Stores Management) Ltd that a guarantor can guarantee the liabilities of an outgoing tenant under an AGA but cannot guarantee the liabilities of an incoming tenant following the assignment of a lease. This decision is undoubtedly a pragmatic one which facilitates the assignment of unwanted leases but it does raise a new question.

In K/S Victoria Street, the Court of Appeal doubted whether a tenant could assign an unwanted lease to its guarantor. No particular reason was given but such an assignment would appear to be contrary to the workings of the 1995 Act because it preserves the guarantor’s liability to the landlord after an assignment. As landlords find new ways to secure income from their properties in difficult times, it seems certain that new cases will come before the courts as novel arrangements and schemes of assignment are tested. For the time being, the AGA saga rumbles on.

For more information on protecting rental incomes from commercial properties please contact Alex Haddad at Nockolds on ahaddad@nockolds.co.uk

Alex Haddad (profile) Wednesday 8th February 2012
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Alex Haddad (profile) Erin Duffy (profile) James Brunton (profile) Tuesday 5th July 2011
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