Authorised Guarantee Agreements: Not clearly understood or properly used

Authorised Guarantee Agreements: Not clearly understood or properly used

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Author: Lisa On-Iam

Authorised Guarantee Agreements have been the subject of much commentary in the last few years - principally because of decisions in Good Harvest Partnership LLP and K/S Victoria Street v House of Fraser (Stores Management) Ltd.

The interest generated by those cases is an indication of the complexities and uncertainties surrounding section 16 of the Landlord and Tenant (Covenants) Act 1995. It is this section that governs the creation, content and validity of an authorised guarantee agreement (AGA).

The 1995 Act introduced a new leasehold regime. Original tenant liability was abolished and, in most cases to which the Act applies, a tenant will be released from all future liability when it assigns a lease.

Landlords were offered some comfort by section 16. Provided that certain circumstances have arisen and certain requirements are complied with an outgoing tenant can guarantee its immediate assignee by means of an AGA.

It is important to appreciate that an AGA is a statutory creation and an exception to the regime introduced by the 1995 Act. The Act contains powerful anti-avoidance provisions to stop parties negotiating around its terms. In practice, this means that if a landlord wants an outgoing tenant to guarantee its immediate assignee it has to ensure that that guarantee complies with the requirements of an AGA. It will be void to the extent that it does not do so.

In theory this is fine. In practice there are a number of uncertainties which arise. Some of these are explained below.

Can a lease require an AGA where Landlord's consent to assign is unnecessary or automatic?
No. In order to qualify as an AGA, a guarantee must be entered into in the circumstances set out in s16(3) of the Act. These include both that consent to assignment is required and that it is a condition of the consent that the tenant enters into an AGA.

It does not matter if the alienation covenant is qualified or absolute, since consent is required in either case.

Can an AGA require an outgoing tenant to be liable for any future AGA given by its assignee?
No. The 1995 Act states that an agreement is not an AGA to the extent that it attempts to impose on the outgoing tenant any liability in relation to any time after the assignee is released from tenant liability by virtue of the 1995 Act. This will generally happen when the lease is assigned.

Can an AGA cover any period of holding over by an assignee?
Yes; but whether it will do so is a matter of drafting.

Where a lease has the protection of sections 24-28 Landlord and Tenant Act 1954, it will be continued by statute after the end of the contractual term. The 1995 Act would not prevent a valid AGA from continuing to have effect during any period of holding over. The assignee in respect of whom the AGA has been given will continue to be liable and so the AGA can continue in effect.

Where there has been an 'excluded assignment', from whom can the landlord require an AGA?
Under the 1995 Act an 'excluded assignment' is an assignment in breach of covenant or by operation of law. Where an excluded assignment takes place, the Act provides that the former, outgoing tenant will not be released from liability until the next non-exclusive assignment takes place.

At that point, both the assigning tenant and the former tenant will be released and the landlord may require both of them to enter into an AGA in relation to the new assignee.

Can an AGA require an outgoing tenant to enter into a new lease if the lease it assigns is forfeited?
This is a moot point. The 1995 Act is clear that an AGA can require an outgoing tenant to take up a new lease if the lease that it assigns is disclaimed. It does not mention forfeiture.

Standard lease guarantees will normally require a guarantor to take up a new lease on disclaimer or forfeiture and similar wording is frequently included in an AGA. A landlord will understandably want to obtain as much security as possible from an AGA; an outgoing tenant may be more circumspect. This point has yet to be decided by the courts.

These examples all serve to illustrate that although AGAs are in everyday use, frequently they are not clearly understood or properly used. When in doubt, parties should be guided by the 1995 Act - and hope that it clarifies the position. It does not always do so.