Assignment of a lease - Authorized guarantee agreements

Learning Outcomes

After reading this article, you will be able to explain the legal process for assigning a lease, the function and requirements of authorized guarantee agreements (AGAs), and the statutory rules governing landlord consent to assignment. You will be able to identify the key terms, statutory provisions, and practical steps relevant to lease assignments and AGAs, and apply these principles to SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the legal and practical aspects of lease assignment and authorized guarantee agreements. Focus your revision on:

• The process and legal effect of assigning a leasehold interest.
• The different types of alienation covenants and their impact on assignment.
• The statutory rules on landlord consent and the reasonableness requirement.
• The purpose, scope, and statutory limits of authorized guarantee agreements (AGAs).
• The relevant provisions of the Landlord and Tenant Act 1927 and the Landlord and Tenant (Covenants) Act 1995.
• The practical and commercial considerations for landlords, outgoing tenants, and assignees in lease assignments.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is an authorized guarantee agreement (AGA) and when can a landlord require one on assignment of a lease?
2. Under what circumstances can a landlord lawfully refuse consent to a lease assignment?
3. What is the effect of an absolute, qualified, and fully qualified covenant against assignment in a commercial lease?
4. How does the Landlord and Tenant (Covenants) Act 1995 affect the liability of an outgoing tenant after assignment?

Introduction

Assignment of a lease is the process by which a tenant transfers their entire leasehold interest to a new tenant (the assignee), usually with the landlord’s consent. In commercial leases, the outgoing tenant may be required to enter into an authorized guarantee agreement (AGA), guaranteeing the immediate assignee’s performance of the lease covenants. The law in this area is governed by both the Landlord and Tenant Act 1927 and the Landlord and Tenant (Covenants) Act 1995, which set out the rules on landlord consent, the reasonableness of refusal, and the scope of AGAs.

Assignment of a Lease: Legal Framework

When a tenant wishes to assign their lease, the lease will usually contain an alienation covenant controlling if and how this can be done. The landlord’s consent is often required, but the law restricts the landlord’s ability to refuse consent unreasonably.

Key Term: assignment of a lease
The transfer by a tenant of their entire leasehold interest to a new tenant (the assignee), who then becomes bound by the lease covenants for the remainder of the term.

Types of Alienation Covenants

Leases may contain one of three main types of alienation covenants:

Key Term: absolute covenant
A clause that completely prohibits assignment of the lease under any circumstances.

Key Term: qualified covenant
A clause that prohibits assignment unless the landlord’s consent is obtained, but does not specify that consent cannot be unreasonably withheld.

Key Term: fully qualified covenant
A clause that prohibits assignment without the landlord’s consent, but expressly states that consent is not to be unreasonably withheld or delayed.

The type of covenant determines the tenant’s ability to assign and the landlord’s discretion to refuse consent.

Statutory Controls on Landlord’s Consent

Section 19(1) of the Landlord and Tenant Act 1927 upgrades any qualified covenant against assignment to a fully qualified covenant. This means that, unless the lease expressly states otherwise, the landlord cannot unreasonably withhold consent to an assignment.

Key Term: reasonableness requirement
The statutory rule that a landlord must not unreasonably withhold consent to assignment where the lease contains a qualified or fully qualified covenant.

The landlord’s reasons for refusal must relate to the landlord-tenant relationship and the lease. Common reasonable grounds include the proposed assignee’s poor financial standing or intended use of the premises in breach of the lease.

Worked Example 1.1

A tenant wishes to assign their lease to a new business. The lease contains a qualified covenant against assignment. The landlord refuses consent because the assignee is a competitor of another tenant in the building and has a weak financial record. Is this refusal reasonable?

Answer: The landlord’s concern about the assignee’s financial standing is a reasonable ground for refusal. Refusing consent due to competition may also be reasonable if the landlord has a tenant-mix policy. The refusal is likely to be lawful.

Authorized Guarantee Agreements (AGAs)

When a lease granted on or after 1 January 1996 (a “new lease”) is assigned, the outgoing tenant is automatically released from future liability under the lease covenants. However, the Landlord and Tenant (Covenants) Act 1995 allows the landlord to require the outgoing tenant to enter into an authorized guarantee agreement (AGA) as a condition of giving consent to assignment.

Key Term: authorized guarantee agreement (AGA)
A written agreement by which the outgoing tenant guarantees the immediate assignee’s performance of the lease covenants after assignment, as permitted by section 16 of the Landlord and Tenant (Covenants) Act 1995.

Statutory Requirements for AGAs

• An AGA can only be required as a condition of consent to assignment, not in advance.
• The outgoing tenant’s liability is limited to guaranteeing the immediate assignee’s performance.
• The AGA must be in writing and executed as a deed.
• The AGA ends when the assignee lawfully assigns the lease to another party.

The landlord cannot require the outgoing tenant to guarantee the performance of any subsequent assignee.

Worked Example 1.2

A tenant assigns a new commercial lease to an assignee with the landlord’s consent. The landlord requires the outgoing tenant to sign an AGA. The assignee later assigns the lease to a third party. Is the outgoing tenant still liable under the AGA?

Answer: No. The outgoing tenant’s liability under the AGA ends when the immediate assignee lawfully assigns the lease. The outgoing tenant is not liable for breaches by subsequent assignees.

Practical and Commercial Considerations

Landlord’s Viewpoint

Landlords are concerned about the risk that an assignee may default on the lease. To manage this risk, landlords may:

• Require financial references or guarantees from the assignee.
• Request a rent deposit or personal guarantee.
• Insist on an AGA from the outgoing tenant if permitted by the lease and statute.

Outgoing Tenant’s Viewpoint

The outgoing tenant will want to be released from future liability. However, if an AGA is required, the outgoing tenant must assess the risk of the assignee defaulting and may seek to limit the scope or duration of the guarantee.

Assignee’s Viewpoint

The assignee must satisfy the landlord’s requirements and may need to provide additional security or agree to lease modifications to obtain consent.

Worked Example 1.3

A landlord consents to assignment only if the outgoing tenant provides an AGA and the assignee pays a rent deposit. The outgoing tenant is concerned about ongoing liability. What options are available?

Answer: The outgoing tenant can negotiate the terms of the AGA (e.g., limit liability to the period the assignee holds the lease) and encourage the assignee to provide additional security to reduce the landlord’s reliance on the AGA.

Summary Table: Lease Assignment and AGAs

Key Point Checklist

This article has covered the following key knowledge points:

• Assignment of a lease is the transfer of the tenant’s entire interest to a new tenant (assignee).
• Alienation covenants may be absolute, qualified, or fully qualified, affecting the tenant’s ability to assign.
• Section 19(1) of the Landlord and Tenant Act 1927 upgrades qualified covenants to fully qualified, requiring landlord’s consent not to be unreasonably withheld.
• The Landlord and Tenant (Covenants) Act 1995 allows landlords to require an authorized guarantee agreement (AGA) as a condition of consent to assignment of new leases.
• An AGA limits the outgoing tenant’s liability to guaranteeing the immediate assignee’s performance, and ends on further assignment.
• Landlords, outgoing tenants, and assignees each have commercial interests to consider in the assignment process.

Key Terms and Concepts

• assignment of a lease
• absolute covenant
• qualified covenant
• fully qualified covenant
• reasonableness requirement
• authorized guarantee agreement (AGA)