The Building Blocks of Real Estate is a new article series exploring many of the key concepts and principles frequently encountered in real estate transactions. Each article will take a look at a different topic and is intended to provide a brief summary of the meaning of the relevant concept/principle, how it is relevant to property transactions and outline why it is important from a practical perspective.
In our first article we discuss Authorised Guarantee Agreements (AGAs). The term "AGA" is well known but in our experience the law surrounding AGAs is not well understood, and therefore we thought it would be helpful to briefly explain what an AGA is and the circumstances in which one may be required.
What is this?
An AGA is an agreement whereby an outgoing tenant, which is assigning its lease (Assignor), guarantees the performance by the incoming tenant (Assignee) of the tenant covenants contained in the lease. An AGA arises on an assignment of a lease to a third party and is very often a condition of the landlord giving its consent to the proposed assignment. The AGA is then often documented within the licence to assign but can be a separate stand alone document.
1. Who is the Assignee?
As the Assignor will be giving a guarantee to the landlord that the Assignee will comply with the tenant covenants in the lease, it is important that proper due diligence is carried out on the proposed Assignee to ensure the Assignor is satisfied the Assignee is capable of fulfilling these obligations.
2. What happens if the Assignee is in default?
In the event of any default by the Assignee, the Assignor agrees to make good that default, for example non-payment of rent, to the landlord. In addition, an AGA usually provides an option for the landlord to request an Assignor take a new lease of the premises on the same terms, including payment of sums due, for the remainder of the lease term.
3. How long does it last?
An AGA lasts for the full period for which the Assignee is liable for the tenant covenants under a lease. Practically this means that an AGA will fall away when an Assignee disposes of its interest in the lease to a third party (i.e. by way of another assignment) or when the lease comes to an end. It is uncommon for there to be any time limit on an AGA.
4. Can the landlord always require an AGA?
A lease will either contain an express provision which automatically requires an outgoing tenant to provide an AGA or this will be limited to circumstances that are “reasonable”. However, certain case law may imply a “reasonableness” test even when the lease does not expressly include such drafting.
This is not intended to be a comprehensive analysis of the law surrounding AGA’s and if you require any further information please contact our real estate team.