Understanding Authorised Guarantee Agreements

The law on Authorised Guarantee Agreements is complicated, and is evolving as cases on the Landlord & Tenant (Covenants) Act 1995 (the “1995 Act”) are working their way through the courts.

Lawyers call leases “old” or “new”, as referred to in the 1995 Act. Leases dated before 1 January 1996 (or granted pursuant to Agreements for Lease entered into before that date) are referred to as “old” leases, and leases dated on or after that date are “new” leases.

With an “old” lease the original landlord and original tenant are bound to perform all the landlord and tenant obligations throughout the whole lease term, even if they transfer their interest to someone else. This principle is called “privity of contract”. So, for example, an original tenant who assigned their lease some years earlier could receive a demand for outstanding rent payments or to perform other tenant obligations, by reason of the default of the current tenant, and they would have to pay up or perform those obligations. This came to be regarded as particularly onerous on tenants and was seen as overly protective of landlords. Accordingly, the 1995 Act set out to release tenants and third parties of their obligations on assignment.

However, this release is qualified, as the landlord has the option to require the outgoing tenant, on assignment, to guarantee the obligations of the new tenant (the “assignee”) by way of an “Authorised Guarantee Agreement”, commonly referred to as an “AGA”. This guarantee only lasts until the assignee assigns its interest in the lease – upon such subsequent assignment the guarantor’s AGA falls away.

An AGA can require the guarantor to enter into a new lease, if the lease is disclaimed by a trustee in bankruptcy or liquidator.

Most AGAs provide for a guarantor’s liability to automatically arise when there is a liability under the lease and does not require a formal demand to be made by the landlord. However, s.17 of the Landlord & Tenant (Covenants) Act 1995 provides that the guarantor will not be liable under an AGA for rent, service charges or other “fixed charges” that the assignee has failed to pay, unless the landlord serves notice on the guarantor within six months of their respective due date, following the assignee’s failure to pay. This is described as a “s.17 Notice”. “Fixed charges” must be ascertained: they can therefore include balancing service charges which have been assessed, or third party costs which have been incurred. This process does not apply to unspecified liabilities such as unquantified claims for compensation for disrepair, which are still claimable, just not through this process.

Having received a s17 Notice the guarantor should settle the liability to the landlord. At this stage the guarantor is not in possession of the premises (having made an assignment of the lease), but still has liability to pay the rent every following quarter if the assignee does not pay it. Having received a s.17 Notice upon which it has made a payment, the guarantor can bring matters to a resolution by serving notice under Section 19 of the 1995 Act (a “s.19 Notice”) calling for an “overriding lease” to be granted. This new lease is inserted between the interests of the landlord and the assignee, converting the assignee into an undertenant. This allows the guarantor to pursue the assignee for the rent debt and/or to negotiate a surrender of the underlease and/or to forfeit the lease (it now being an underlease) which enables the guarantor to re-use the premises or to market and dispose of them a second time.

The landlord may have several people upon whom a s.17 Notice can be served and needs to be aware of the fact that any one of them can apply for an overriding lease.

The landlord should therefore only serve a s.17 Notice upon a party who it would be prepared to have as its tenant going forwards pursuant to an overriding lease.

A guarantor under an AGA should take legal advice promptly upon receipt of a s.17 Notice.