If you own a business and operate from a property under a commercial lease, you will have various obligations to your landlord under the terms of your lease. Should you wish to sell the business and assign your interest in the lease to the new owner, it is important to be aware that your liabilities under the lease may still continue after assignment.
The law on assignment of leases
Leases granted on or before 31 December 1995 are known as “old tenancies”. Where a tenant assigns an old lease to a new tenant (“assignee”), the tenant remains liable for the obligations under the lease.
The Landlord and Tenant (Covenants) Act 1995 (“the Act”) introduced a new type of tenancy known as a “new tenancy”. These are tenancies granted on or after 1 January 1996.
Where a tenant assigns a new tenancy, he will automatically be released from the covenants (liabilities and obligations) in the lease. This means that the assignee will have full responsibility when he takes over the lease.
On first glance, it would therefore appear that the law protects tenants on assignment of the lease. This potentially leaves landlords in a position where they have a tenant they didn’t choose (the assignee); with the risk that they may not comply with their obligations under the lease.
For this reason, s16 of the Act allows landlords to require tenants to enter into an Authorised Guarantee Agreement (AGA) as a condition of the landlord’s consent to assign the lease.
What is an Authorised Guarantee Agreement?
An AGA is the tenant effectively guaranteeing any future breaches of covenant by the assignee. This means that if the assignee fails to pay rent to the landlord or causes damage to the property, the landlord can demand payment from the tenant.
As a tenant’s liability is automatically released on assignment of a lease, the tenant must consent to enter into the AGA for it to be a valid agreement. However, in order to obtain consent from your landlord to assign the lease, he may require the tenant to enter into an AGA. This leaves the tenant having to choose between remaining in the property, or agreeing to guarantee the assignee’s performance of the lease.
What do I do next?
Firstly, check your lease. Are there any restrictions on assigning the lease to a third party?
If you wish to sell your business and are required to enter into an AGA, make sure you are confident that the incoming tenant is able to pay the rent and perform the other obligations under the lease. Consider whether the new tenant is a business start-up or whether they are an established business with good accounts.