Assignment

Assigning a lease of a commercial property is essentially when a tenant (the assignor) transfers or sells the lease to another tenant, a third party known as the “assignee”.

Most commercial leases allow tenants to assign their lease to a new tenant, subject to certain constraints and safeguards. The existing tenant will have to find a suitable replacement tenant at its own expense. The landlord will have certain expectations of the new tenant as they had when selecting the existing tenant, most likely that the new tenant is financially sound and has a business which is suitable for the premises, meeting the requisite business use approved categories.

While at landlord cannot unreasonably withhold consent to an assignment, they are under no obligation to give their consent (a licence to assign) if the new tenant doesn’t meet the terms set out in the original lease - so tenants need to pay attention to the selection process for a new replacement tenant.

Common restrictions might also include if the new tenant is unwilling to agree to a lease renewal when the existing lease is coming to an end very soon.

Tenants often think they can bring in a new tenant and walk away from their obligations under a lease, but it is very likely the lease will include a provision that the outgoing tenant enters into an Authorised Guarantee Agreement or "AGA".

This article applies primarily to England and is not a full interpretation of the law, only the courts can decide. Although tenancy laws are similar in other jurisdictions, there may be significant differences. Always seek professional advice before making or not making important decisions. ‍

The guarantee

A common condition of the landlord giving consent to an assignment is that their outgoing tenant agrees to underwrite the risk a new tenant poses by way of a guarantee that the incoming tenant's liabilities will be covered by by the existing tenant by what is known as an AGA: an 'authorised guarantee agreement'.

This arrangement ensures the landlord is secure in the knowledge that if the new tenant fails to meet its obligations in some way, the existing tenant steps in to cover any losses, rent arrears, or failure to meet repairing obligations.

That's all fine until the existing tenant can no longer honour the guarantee (AGA), or if the existing tenant's security was in turn dependent on the backing of its own guarantor. In that case the landlord would perhaps prefer the AGA to be with the existing tenant's guarantor.

The legal case

An outgoing tenant's guarantor cannot enter directly into an AGA with the landlord to guarantee the incoming tenant's performance as it would be void under s25 of the Landlord and Tenant (Covenants) 1995, so the guarantee would be unenforceable.*

However, the outgoing tenant's performance can be guaranteed under the AGA through a sub-guarantee, known as a GAGA - nothing to do with Lady Gaga -but it's enough to send you gaga, especially when we find that EMI was her original distributor of the music.

But by this means, if the incoming tenant fails to meet its obligations under the lease, the landlord can pursue the outgoing tenant under the AGA. If in turn the outgoing tenant fails to then meet their guarantee obligations under the AGA, then the landlord can pursue the outgoing tenant's guarantor under the GAGA.

EMI Group Limited v The Prudential Assurance Company Ltd

In the case of EMI Group Limited v The Prudential Assurance Company Ltd (2020) (EMI) had been guarantor for the liabilities of the original tenant (HMV) under a lease granted for 25 years from 29 September 1999.

Prior to an assignment of that lease to another tenant (Forever21 (UK) Ltd) in 2011, HMV entered into an authorised guarantee agreement (AGA) guaranteeing the obligations of the prospective new tenant.

Forever21 went into administration and failed to pay the rent and service charge under the lease amounting to nearly £5m.

As HMV had been dissolved The Prudential sought to recover the amounts due from EMI, which had given a GAGA in respect of HMV's AGA, follow the logic up to now?

EMI argued that the GAGA fell foul of the anti-avoidance provisions in the 1995 Act, because a guarantor must be released 'to the same extent as a tenant on assignment. However, the court disagreed.

EMI argued that it was being asked to guarantee not only HMV but also any future tenant.

However, the judge in the case rejected this argument and decided that the definition referred to "one person only". The lease allowed for the possibility that any future guarantee may be given in a licence to assign before the assignment to an incoming tenant is completed. And the lease provided that on assignment, if reasonable, the landlord could require an assignee to produce a new guarantor on the same terms.

EMI also argued that the words “while the Principal is bound by the tenant covenants of this lease” made the provision void as it covered the situation where HMV assigned the lease and then took an assignment back in the future, which would cause the guarantee to be revived. But the judge however rejected this argument interpreting those words as to cover just a single period of time whilst HMV was first a tenant under the lease. EMI was on the hook!

The Judge held that a guarantee (GAGA) of an authorised guarantee agreement (AGA) is valid and enforceable, despite the dissolution of the original tenant (HMV) providing the AGA.

* The Landlord and Tenant Covenants Act 1995 is an important piece of legislation in the UK that has to some extent transformed the landlord and tenant relationship in commercial leases. This Act, often referred to as the "1995 Act", introduced reforms in what were perceived by many as injustices in landlord and tenant law, particularly concerning leasehold covenants in commercial leases. The Act was an attempt therefore to balance the rights and obligations of both landlords and tenants in a lease.

One of the main issues tackled by the Act was the historically applied concept of "privity of contract" and "privity of estate". This concept in law meant that original tenants were liable for the liabilities of a lease indefinitely, liable for the covenants of the lease regardless of the assignment to other assignees. This often led to cases coming into the courts when original tenants were being held liable for breaches of covenant, committed by subsequent tenants. This could be many years after the original lease had been assigned to a new tenant.

The Landlord and Tenant Covenants Act 1995 abolished the privity of contract rules relating to commercial leasehold covenants and established what was deemed to be a fairer legal framework for these landlord and tenant relationships. The Act aimed to ensure that once a tenant had assigned a lease, they would be released from future liability and that landlords would have adequate remedies in the event of a breach of covenant.

This is where the AGA and GAGA come in. The Act introduced the concept of "Authorised Guarantee Agreements" (AGAs). Under an AGA, the outgoing tenant can agree to guarantee the performance of the covenants by the incoming tenant, but this is not automatic or mandatory. This tenant must agree to it. However, when it is a greed the AGA provides a good level of protection for landlords. It ensures they have a a claim against the assignor tenant in the event of a breach of covenant by the new tenant (assignee).

The Act gives balancing rights to commercial tenants by also making provisions for the landlords' obligations. It made sure landlords are bound by the covenants in the lease, and that these landlord's obligations will pass on to anyone who subsequently becomes a landlord of the property.