GAGA about AGAs

An option available to a tenant under a commercial lease is the ability to assign (or transfer) the lease to a third party. This will usually require the landlord’s consent. One of the conditions of a landlord giving their consent will inevitably be that the outgoing tenant agrees to guarantee the incoming tenant’s liabilities for the lease in an “authorised guarantee agreement”, or AGA. This ensures that the landlord doesn’t lose a perfectly good tenant only to replace them with a tenant of far lesser covenant strength (ability to pay). From a landlord’s perspective though, the AGA is of little use to them if the outgoing tenant company is to be dissolved, or the original tenant’s strength was through the backing of a substantial guarantor. The landlord may therefore decide that they would prefer the tenant’s guarantor to enter into the AGA.

In Good Harvest Partnership LLP vs Centaur Services Limited [2010], the High Court decided that any attempt by a commercial landlord to do this would be void under s25 of the Landlord and Tenant (Covenants) 1995 so the guarantee would be unenforceable. It will still be void even if the guarantor voluntarily agrees to enter into the AGA, or if the lease itself sets out this contractual requirement. Bad news for landlords.

In K/S Victoria Street vs House of Fraser (Stores Management) Ltd [2010], however, a case decided later that year, the Court decided that whilst Good Harvest was good law, a sub-guarantee given by the tenant’s original guarantor (or indeed any guarantor) was still valid.

So what’s the difference? The outgoing tenant’s guarantor cannot enter into an AGA with the landlord to guarantee the incoming tenant’s performance. However, they can guarantee the outgoing tenant’s performance under the AGA through a sub-guarantee, sometimes known as a GAGA. This is a very crucial difference. It means that if the incoming tenant fails to meet their lease obligations the landlord pursues the outgoing tenant under the AGA. If the outgoing tenant fails to then meet their guarantee obligations under the AGA, then the landlord can pursue the tenant’s guarantor under the GAGA.

If you have any queries at all on assigning a lease of a commercial premises, please contact Jenny Colvin in our Portsmouth based Commercial Property team on 023 9277 6558.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.