When you take your new premises, it’s a mistake to be too focused on the here and now. Yes, you need to be concerned about fitting out the premises, the move in date, getting the electricity account in your name, and negotiating a rent-free period.
But spare a thought for the future. Obviously you’re not anticipating your new business going bust and you having to find someone to take over the premises. But you should be anticipating that one day the business will be so successful that you will want to sell it on and retire, or get bigger premises and dispose of these ones.
For whatever reason you may want or need to do it, you can only sell on your premises to the buyer of your business or to someone who wants to start up their own new business, if you get permission from your landlords. Your landlords don’t have to give you that permission necessarily. In some circumstances, they can say “no” to your proposed replacement tenant, or they can say “yes” but require a whole load of tough conditions to be met. One of those tough conditions may be that you have to guarantee the payment of rent and performance of obligations by the incoming tenant.
That is the last thing you want if you’re trying to have a clean break from the premises, or if you are already loaded up to the eyeballs with obligations relating to your expanding business.
The issue in question is the “authorised guarantee agreement” – known as an “AGA” (pronounced like the cooker). An authorised guarantee agreement is a personal guarantee, from the existing tenant to the landlords, that the incoming tenant or assignee will pay the rent and perform the obligations under the lease. If they don’t, then the existing tenant – now happily sitting in his deckchair on a Cornish beach – may suddenly find himself having to rush back to his old business address and start paying rent again.
This may seem rather unfair arrangement. But it is in fact better than the way things were before 1996. In those days, any tenant who sold or transferred his leased premises on to someone else remained liable to the landlords, and his only protection was the indemnity (a guarantee by another name) which he got from the successor tenant. Since, by definition, the landlords’ call on the original tenant’s guarantee was because the successor tenant, or even his successor, was going bust, the indemnity obtained by the original tenant from his successor is not worth much!
The new law that came into effect for leases granted after 1995 was that the automatic guarantee no longer applied, but the landlord can still require a tenant to enter into an authorised guarantee agreement. This is better than the previous situation in a couple of ways. First, it doesn’t happen automatically – it’s a matter of agreement between the landlord and the original tenant when the lease is signed whether it is obligatory or not. Second, an authorised guarantee agreement is only to guarantee tenant number 1’s immediate successor as tenant. Once tenant number 2 assigns the tenancy to a new tenant, the tenant number 1’s obligation to the landlord comes to an end.
You have had to read a long way to get to the point where I tell you how new tenants often innocently create a pitfall for themselves.
The situations in which the landlords can require the tenant to enter into an authorised guarantee agreement are set out in the lease. It’s possible for the lease to say that every tenant must, when assigning, enter into an authorised guarantee agreement with the landlord.
Many leases, however, say that the landlord can only require an authorised guarantee agreement when it is reasonable to do so. If you sell your premises to Waitrose, obviously it wouldn’t be reasonable for you to need to guarantee them. That wouldn’t be reasonable and so the landlord couldn’t require it – as long as the lease was worded to insist on reasonableness.
It’s all down to what you agreed to when you negotiate the lease. Your solicitors should amend any absolute obligation to give an AGA so that it says that you only have to do it when it reasonable for you to do so. You should also seek to negotiate a time limit on such a guarantee, or the right to be released if the incoming tenant is reliable or meets financial targets.
Landlords will want to give themselves the maximum possible protection in the future. They don’t have to think hard about this, they just leave it their solicitors to put these requirements in the lease automatically. You should make sure that your solicitors are going through all these requirements and making sure they are fair and reasonable.