What is an AGA? When are you required to give one and what does it mean?

An authorised guarantee agreement (“AGA”) is an agreement where the outgoing tenant enters into an agreement guaranteeing that the assignee will observe and perform the covenants in the lease.

This may occur when the owner of a veterinary practice may decide that they want to sell their practice to a proposed buyer. As part of the transaction, if you, as the owner, occupy the property under a lease and you still have a significant number of years left to run on your term you may decide that you want to assign or transfer your interest to the proposed buyer. You will be required to obtain consent from the landlord, and this cannot not be unreasonably withheld or delayed.

The landlord may require you to obtain financial forecasts and references from the proposed assignee. However, you may still be left with the risk that the assignee does not comply with their obligations under the lease. By entering into an AGA with the landlord and the assignee, you will largely be guaranteeing any future breaches of covenant under the lease by the assignee. This means that if the assignee fails to pay rent, the landlord has the option to demand payment from you or require that you take a new lease for the remainder of the term of the lease.

In most circumstances, you will be proposing to assign or transfer your interests in the lease to a third party. The Licence to Assign enables you to transfer the lease to assignee, and acts as the landlord’s consent to the transfer. Following completion of the Licence to Assign, you and the assignee will then enter into a separate transfer or deed of assignment to document the assignment of the lease from the tenant to the assignee.

When are you required to give one?

This is often a requirement set out in the lease in accordance with S19 (IA) of the LTA 1927, in which case it must be complied with. If the lease simply says that the tenant is not to assign without landlord’s consent, it will be implied that the consent cannot be unreasonably withheld.

If it is not set out in the lease, the landlord may request from the outgoing tenant an AGA, provided that it was reasonable in the circumstances. The standard position is that the AGA will last from the date of the assignment of the lease to the assignee until the earlier of either:

• The date that the assignee validly disposes of their interest in the lease to a third party
• Until the lease comes to an end.

The 2007 Code of Lease Business Premises states that an AGA should not be automatic requirement on an assignment of a lease. It is necessary only when the assignee is of a lower financial standing than the assignor, or is resident or registered overseas. It may be worth mentioning this to the landlord – however, they still may still insist that a guarantee is required.

In the first instance, it will be agreed between parties at the start of the transaction and set out in the heads of terms who will be responsible for the landlords’ legal costs in preparing and completing the Licence to Assign and any associated documents.

In most circumstances, if you are assigning the lease, the onus will be on you as the existing tenant to pay the landlord’s cost as you are requesting the assignment to exit the lease. However, this will depend on each party as every transaction is different. The licence then contains a clause obliging the landlord’s legal costs to be settled on completion of the licence.

To that end, it is usually standard practice for the landlord to insist on an outgoing tenant entering into an AGA on an assignment of a new lease and as mentioned in this article, your liability will continue until the end of term of the lease (however it may end). Therefore, as the tenant, it is important that you understand what you will be agreeing to as it essentially means that whilst the assignee is the tenant under the lease, you will be the guarantor.

It should be noted that this is note has been prepared on the basis that the lease that is being assigned is a new lease for the purposes of the Landlord and Tenant (Covenants) Act 1995 -namely a lease granted after 1st January 1996.