Assignment of a lease - Authorized guarantee agreements

Learning Outcomes

This article outlines lease assignment and authorized guarantee agreements (AGAs), including:

• The legal framework and practical steps for assigning commercial leases, from interpreting alienation covenants to executing and registering the assignment.
• How “old” and “new” leases differ in relation to continuing tenant liability, privity of contract and estate, and statutory release on assignment.
• When landlord consent is required, how the statutory upgrade of qualified covenants operates, and what counts as reasonable or unreasonable refusal or delay.
• The structure, purpose, and statutory limitations of AGAs, including when they may be insisted upon and how far they can extend to guarantors and subsequent assignees.
• The interaction between the Landlord and Tenant Acts 1927 and 1988 and the Landlord and Tenant (Covenants) Act 1995 in governing consent, remedies, and anti‑avoidance.
• The operation, timing requirements, and tactical use of section 17 notices to recover fixed charges from former tenants and guarantors.
• Typical exam-style scenarios in which you must advise landlords, outgoing tenants, or assignees on consent conditions, drafting AGAs, tenant indemnities, and risk allocation on assignment.
• Common pitfalls tested in SQE1, such as invalid AGAs, impermissible guarantor arrangements, late section 17 notices, and unreasonable conditions attached to consent.

SQE1 Syllabus

For SQE1, you are required to understand the legal and practical aspects of lease assignment and authorized guarantee agreements, with a focus on the following syllabus points:

• 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.
• The landlord’s statutory duties under the Landlord and Tenant Act 1988, including giving consent within a reasonable time and providing reasons in writing.
• Release of tenants and guarantors on assignment of “new leases” and the anti-avoidance provisions of the 1995 Act.
• Section 17 notices for recovery of fixed charges from former tenants and guarantors under “new leases”.
• Indemnities and covenants for title on assignment of leasehold interests, and how these are modified in practice.
• Registration and execution requirements for assignments of registered and unregistered leases.

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?
5. What is a section 17 notice and what time limit applies to serving it?

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.

The date the lease was granted is material. For “old leases” (granted before 1 January 1996), privity of contract means the original tenant remains contractually liable for lease covenants for the whole term, even after assigning, although they will cease to be liable for future breaches in privity of estate. For “new leases” (granted on or after 1 January 1996), the 1995 Act releases the outgoing tenant from future liability when the lease is assigned, subject to any lawful AGA. The outgoing tenant remains liable for breaches that occurred before assignment. The Landlord and Tenant Act 1988 overlays this framework by imposing procedural duties on landlords when a tenant seeks consent to assign, including responding within a reasonable time and giving reasons for any refusal.

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.

Key Term: old lease
A lease granted before 1 January 1996. The original tenant remains liable under privity of contract for tenant covenants throughout the term despite assignment.

Key Term: new lease
A lease granted on or after 1 January 1996. The outgoing tenant is released from future liability on assignment, subject to any lawful AGA.

Key Term: privity of contract and privity of estate
Privity of contract is the contractual link between original landlord and tenant; privity of estate is the property relationship between current landlord and tenant. Under old leases, privity of contract keeps the original tenant liable after assignment; under new leases, statutory release replaces that.

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. The assignment must be effected by deed and, if the lease is registered, the assignment must be completed by registration at HM Land Registry to take effect in law. For unregistered leases, first registration may be triggered if the unexpired residue exceeds the statutory threshold; otherwise the assignment takes effect on execution of the deed.

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. Absolute prohibitions prevent assignment outright (commonly used for assignment of part). A qualified covenant is upgraded by statute so that consent cannot be unreasonably withheld. Fully qualified covenants typically also address timing, making unreasonable delay unlawful.

In practice, commercial leases often include detailed, express preconditions to consent (for example, delivery of references, accounts, or an AGA). If those preconditions are stated as absolute conditions of consent, compliance will ordinarily be treated as reasonable to require. If not expressly stipulated, any conditions demanded must still be reasonable in the circumstances.

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 reasonableness assessment focuses on the landlord and tenant relationship and property management concerns. Consent may be reasonably withheld where, for example, the proposed assignee has weak financial standing, lacks relevant trading experience for the permitted use, intends to use the premises in breach of the user clause, or where there is a well-founded tenant mix policy the assignee would disrupt. Consent must not be refused for collateral or discriminatory purposes unrelated to the lease or the premises.

The Landlord and Tenant Act 1988 imposes further duties on landlords once a tenant makes a proper written application for consent. The landlord must:

• Deal with the application within a reasonable time.
• Give written consent or written refusal, with reasons for any refusal.
• Pass the application promptly to any person whose consent is also required (e.g., a superior landlord or mortgagee), and use reasonable endeavours to obtain such consent.

Failure to comply can give rise to damages under the 1988 Act, in addition to any contractual or statutory remedies. “Reasonable time” is fact-sensitive, but case law has treated periods of approximately 2–4 weeks as a useful benchmark in straightforward cases. Longer periods may be reasonable where, for example, a superior landlord’s consent is required or the application is complex, but undue delay without good reason is a breach.

Conditions attached to consent must themselves be reasonable. Typical reasonable conditions include payment of the landlord’s reasonable legal and surveyor’s costs, rectification of existing breaches, provision of financial security (such as a rent deposit or guarantee), and—where permitted—an AGA. Conditions aimed at extracting a premium or profit share, or widening the assignee’s obligations beyond the lease, are likely to be unreasonable.

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.

AGAs are common in commercial practice. They protect the landlord against the risk that the immediate assignee defaults but are tightly controlled by statute. The guarantee may only extend to the immediate assignee and only whilst that assignee remains the tenant. Any attempt to require the outgoing tenant to guarantee subsequent assignees is void.

Statutory Requirements for AGAs

• An AGA can only be required as a condition of consent to assignment, not in advance or as a freestanding obligation divorced from a particular assignment.
• The outgoing tenant’s liability is limited to guaranteeing the immediate assignee’s performance of tenant covenants. The guarantee must not impose obligations more onerous than those under the lease or extend beyond the immediate assignee.
• The AGA must be in writing and, in practice, is executed as a deed.
• The AGA ends when the assignee lawfully assigns the lease to another party or the lease otherwise ceases to be vested in the assignee, subject to any obligations lawfully included (for example, to take a new lease on disclaimer).
• An AGA may lawfully require the outgoing tenant to:
  • Guarantee payment of rent and performance of tenant covenants.
  • Indemnify the landlord against losses caused by the assignee’s breaches.
  • Pay the rent and perform the covenants in default of the assignee.
  • Take a new lease if the lease is disclaimed on insolvency, or pay a liquidated sum in lieu if the landlord does not require a new lease.

Where the lease expressly specifies an AGA as an absolute condition to consent to assignment of whole, it will be reasonable for the landlord to insist upon one. If not expressly stated, an AGA may still be required, but only if it is reasonable to do so in the circumstances (for example, the assignee’s covenant strength is weaker than the outgoing tenant’s).

A landlord cannot lawfully require the outgoing tenant’s guarantor to guarantee the assignee directly. However, the guarantor may legitimately be required to guarantee the outgoing tenant’s obligations under the AGA, thereby indirectly guaranteeing the immediate assignee.

Key Term: section 17 notice
A default notice under section 17 of the 1995 Act served on a former tenant or former guarantor to recover a fixed charge (e.g., rent, service charge, or other liquidated sum). It must be served within six months of the sum falling due.

Section 17 notices are often relevant where a landlord seeks to recover fixed charges from a former tenant who is liable under an AGA or from a former guarantor. Service within six months is mandatory; failure to serve within that period bars recovery of that fixed charge from the former tenant or former guarantor.

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

Assignments involve parallel legal and commercial assessments. Parties should anticipate the landlord’s information requests and negotiate security packages in light of statutory constraints.

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, accounts, and business plans from the assignee to assess covenant strength.
• Request a rent deposit or personal/company guarantee from the assignee.
• Insist on an AGA from the outgoing tenant if permitted by the lease and statute, especially where the assignee’s covenant strength is weaker.
• Require rectification of any existing breaches by the outgoing tenant before consenting.
• Seek payment of reasonable legal and surveyor’s costs associated with considering and documenting the assignment and any conditions.

In assessing reasonableness, landlords should avoid imposing conditions that go beyond the lease or amount to a premium for consent. Conditions should be targeted at legitimate risk mitigation for the property and the lease obligations.

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. Practical steps include:

• Negotiating the AGA’s terms to mirror the lease covenants without added burdens, ensuring release on the assignee’s lawful assignment.
• Seeking to exclude obligations relating to the physical condition of the premises where appropriate, and avoiding warranties beyond the lease.
• Encouraging the assignee to provide additional security (rent deposit or guarantee) to reduce reliance on the AGA.
• Ensuring the assignment deed includes an express indemnity from the assignee to the outgoing tenant, so that any sums paid under an AGA can be recovered from the assignee. For old leases, an indemnity is essential; for new leases with an AGA, it remains prudent.

On the assignment of leasehold property, the outgoing tenant should ensure that covenants for title are appropriately modified so that implied covenants do not extend to the physical state or repair of the premises.

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. Key considerations include:

• Presenting strong financial evidence and references to support covenant strength.
• Accepting a rent deposit or personal guarantee where commercially necessary.
• Complying with all lease covenants from completion; the assignee is liable while the lease is vested in them.
• Avoiding any request by the landlord for a direct covenant that would unlawfully extend liability beyond their tenancy or across future assignments.

Assignees should also check whether superior landlord or lender consents are required and factor any additional timing into the transaction.

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.

Worked Example 1.4

A landlord seeks to recover six months’ unpaid rent (a fixed charge) from a former tenant who guaranteed the immediate assignee under an AGA. The rent fell due on 1 January. The landlord first serves a notice on 10 August. Can the landlord recover the arrears from the former tenant?

Answer:
No. A section 17 notice must be served within six months of the sum falling due. The notice served on 10 August is out of time for rent due on 1 January, so recovery of that fixed charge from the former tenant is barred.

Worked Example 1.5

A tenant applies for consent to assign and supplies full details of the proposed assignee and accounts. The landlord does not respond for eight weeks. Is this compliant with the landlord’s duties?

Answer:
Likely not. The landlord must deal with the application within a reasonable time and give written consent or refusal with reasons. In a straightforward case without the need for superior landlord consent, eight weeks’ silence is likely an unreasonable delay, breaching the Landlord and Tenant Act 1988.

Worked Example 1.6

A lease requires an AGA on assignment. The landlord also demands that the outgoing tenant’s guarantor guarantees the assignee directly. Is this lawful?

Answer:
No. The landlord may require the guarantor to guarantee the outgoing tenant’s obligations under the AGA (indirectly guaranteeing the assignee), but a direct guarantee of the assignee by the outgoing tenant’s guarantor is unlawful under the 1995 Act’s anti-avoidance framework.

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 Act 1988 imposes duties on landlords to respond within a reasonable time, to give reasons in writing for any refusal, and to pass on applications to those whose consent is needed.
• 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.
• A guarantor of the outgoing tenant may guarantee the outgoing tenant’s obligations under the AGA, but cannot be required to guarantee the assignee directly.
• A section 17 notice is required to recover fixed charges from former tenants or guarantors under new leases and must be served within six months of the sum becoming due.
• Outgoing tenants should seek an express indemnity from the assignee; covenants for title on assignment of leasehold should be appropriately modified in respect of property condition.
• Assignments must be effected by deed and, for registered leases, completed by registration to be effective at law.

Key Terms and Concepts

• assignment of a lease
• absolute covenant
• qualified covenant
• fully qualified covenant
• reasonableness requirement
• authorized guarantee agreement (AGA)
• old lease
• new lease
• privity of contract and privity of estate
• section 17 notice