licence to assign with aga plc

Licence to assign: new lease with AGA and guarantee

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{{bckdata.locationheading}}, {{headerdata.hamburgerprimaryfeatureheading}}, {{tile.title}}, {{headerdata.hamburgersecondaryfeatureheading}}, when can a guarantor guarantee an aga.

The High Court decision in Co-Operative Group Food Ltd v. A&A Shah Properties Ltd [2019] EWHC 941 (Ch) is an interesting decision on the thorny issue of how a guarantor can validly guarantee an outgoing tenant's obligations in an authorised guarantee agreement (AGA) without falling foul of the Landlord and Tenant (Covenants) Act 1995 (the Act).

The Act requires that on an assignment of a new lease the outgoing tenant is released from the tenant covenants and, at the same time, any guarantor of that outgoing tenant is simultaneously released from its guarantee. The one qualification to this is that the outgoing tenant may be required to enter into an AGA to guarantee the performance by the assignee of the tenant covenants in the lease. Case law has established that in turn the outgoing tenant's guarantor (OTG) can guarantee the outgoing tenant's performance of its obligations under the AGA (a sub-guarantee). However, should the OTG guarantee performance of the tenant's covenants by the assignee that would be a direct guarantee and would be rendered invalid by the anti-avoidance provisions of the Act.

The decision

The question that arose in this case was whether two separate provisions in a licence to assign each amounted to a valid sub-guarantee of an AGA or, alternatively, whether they amounted to direct guarantees that fell foul of the Act.

The first provision read:

"The tenant and the [OTG] covenant to observe and perform the obligations set out in the … [AGA] …immediately after completion of the assignment."

Reversing the 2018 summary judgment, the High Court held that, since the obligations under the AGA were guarantees of the obligations of the assignee, this made the OTG's obligations under this clause "a direct guarantee of the assignee and it is accepted (for the purposes of this appeal) that that would be avoided under the Act". This clause was therefore held to be unenforceable against the OTG.

The second provision was less clear-cut. It provided that:

"… the [OTG] agrees that its guarantee and other obligations under the Lease shall remain fully effective and … shall extend and apply to the covenants given by and the obligations on the part of the [outgoing tenant] under this Licence".

The High Court held this amounted to a valid sub-guarantee (in agreement with the 2018 summary judgment). The decision could be justified in one of two ways:

• since the outgoing tenant had covenanted elsewhere in the licence to observe and perform the provisions of the AGA, this was a clear sub-guarantee of the outgoing tenant's performance of the same; and/or
• by virtue of another provision in the licence, any references to the licence extended also to the schedule to the licence which contained the AGA. As such, this provision should be read as if the words "and the schedule" had been included at the end.

Landlords need to be careful that any drafting they use falls on the right side of the distinction between a sub-guarantee and direct guarantee, otherwise they may find that they cannot claim against the guarantee right at the very moment they most need to (in this case, when the assignee and the outgoing tenant had both entered into administration). The key is to ensure that the OTG only ever guarantees performance by the outgoing tenant and not performance by the assignee. While in this case the second provision was held to be an enforceable sub-guarantee, we would caution against using that drafting for two reasons: firstly, because it was not clear enough to avoid a dispute; and secondly for the reason given below.

The second provision refers to the OTG's "guarantee and other obligations under the Lease" remaining "fully effective" and being extended to cover the outgoing tenant's obligations in the AGA. Under the terms of section 24 of the Act an OTG is required to be released from its existing guarantee when the lease is assigned. Any attempt to extend that guarantor's obligations following assignment will be unenforceable. The most extreme example of this was in EMI Group Ltd v. O&H Q1 Ltd [2016] EWHC 529 (Ch) in which an OTG took an assignment of the lease and that assignment was held to have been rendered void by section 24 since the overall effect of the assignment was that the OTG was never effectively released from its covenants. While it appears this point was argued in this case, the High Court ruled that "the natural effect" of the words used in the second provision was "to create a fresh obligation". Given the EMI ruling it would be unsurprising if this point was appealed.

The difficulties revealed by EMI and this decision will no doubt add weight to calls for reform of the Act which is regarded by many as unsatisfactory for the way in which it adds complications to assignments (particularly intra-group). However, for the time being, it looks as though reform is not going to be forthcoming so parties will have to continue to work within its confines and stay alert to (and try to avoid) some of the uncommercial outcomes that it can produce.

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What is an AGA? When are you required to give one and what does it mean?

An authorised guarantee agreement (“AGA”) is an agreement where the outgoing tenant enters into an agreement guaranteeing that the assignee will observe and perform the covenants in the lease.

This may occur when the owner of a veterinary practice may decide that they want to sell their practice to a proposed buyer. As part of the transaction, if you, as the owner, occupy the property under a lease and you still have a significant number of years left to run on your term you may decide that you want to assign or transfer your interest to the proposed buyer. You will be required to obtain consent from the landlord, and this cannot not be unreasonably withheld or delayed.

The landlord may require you to obtain financial forecasts and references from the proposed assignee. However, you may still be left with the risk that the assignee does not comply with their obligations under the lease. By entering into an AGA with the landlord and the assignee, you will largely be guaranteeing any future breaches of covenant under the lease by the assignee. This means that if the assignee fails to pay rent, the landlord has the option to demand payment from you or require that you take a new lease for the remainder of the term of the lease.

In most circumstances, you will be proposing to assign or transfer your interests in the lease to a third party. The Licence to Assign enables you to transfer the lease to assignee, and acts as the landlord’s consent to the transfer. Following completion of the Licence to Assign, you and the assignee will then enter into a separate transfer or deed of assignment to document the assignment of the lease from the tenant to the assignee.

When are you required to give one?

This is often a requirement set out in the lease in accordance with S19 (IA) of the LTA 1927, in which case it must be complied with. If the lease simply says that the tenant is not to assign without landlord’s consent, it will be implied that the consent cannot be unreasonably withheld.

If it is not set out in the lease, the landlord may request from the outgoing tenant an AGA, provided that it was reasonable in the circumstances. The standard position is that the AGA will last from the date of the assignment of the lease to the assignee until the earlier of either:

• The date that the assignee validly disposes of their interest in the lease to a third party
• Until the lease comes to an end.

The 2007 Code of Lease Business Premises states that an AGA should not be automatic requirement on an assignment of a lease. It is necessary only when the assignee is of a lower financial standing than the assignor, or is resident or registered overseas. It may be worth mentioning this to the landlord – however, they still may still insist that a guarantee is required.

In the first instance, it will be agreed between parties at the start of the transaction and set out in the heads of terms who will be responsible for the landlords’ legal costs in preparing and completing the Licence to Assign and any associated documents.

In most circumstances, if you are assigning the lease, the onus will be on you as the existing tenant to pay the landlord’s cost as you are requesting the assignment to exit the lease. However, this will depend on each party as every transaction is different. The licence then contains a clause obliging the landlord’s legal costs to be settled on completion of the licence.

To that end, it is usually standard practice for the landlord to insist on an outgoing tenant entering into an AGA on an assignment of a new lease and as mentioned in this article, your liability will continue until the end of term of the lease (however it may end). Therefore, as the tenant, it is important that you understand what you will be agreeing to as it essentially means that whilst the assignee is the tenant under the lease, you will be the guarantor.

It should be noted that this is note has been prepared on the basis that the lease that is being assigned is a new lease for the purposes of the Landlord and Tenant (Covenants) Act 1995 -namely a lease granted after 1st January 1996.

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About the Author

Rhondda ramdin, solicitor.

Rhondda Ramdin is a Worcester solicitor , specialising in real estate .

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OFAC Issues Two New General Licenses for Companies Doing Business with GAZ Group

OFAC also issued General License 13N (“GL 13N”), which replaces and supersedes GL 13M . GL 13N authorizes certain transactions necessary to divest or transfer debt, equity, or other holdings in GAZ Group and its 50%-or-greater-owned subsidiaries. As with the other new license, GL 13N took effect on March 20, 2020 and extends the deadline for companies to divest from GAZ Group to July 22, 2020. Any company that engaged in transactions under GL 13M should now reference GL 13N instead.

Anyone relying on either GL 15H or GL 13N should be aware that each General License imposes certain terms and conditions which must be satisfied in order to qualify for their respective authorizations.  Additionally, GL 15H and GL 13N each impose comprehensive and detailed reporting requirements, so persons conducting transactions or activities under GL 15H or GL 13N should document those transactions and activities carefully.

Husch Blackwell continues to monitor the Ukraine- and Russia-related OFAC sanctions and will provide updates as new information becomes available. If you have any questions regarding General Licenses 15H and 13N, or other OFAC sanctions, please contact Cortney Morgan or Grant Leach of Husch Blackwell’s Export Controls & Economic Sanctions team.

OFAC issues Russia-related general license 13A

On May 25, 2022, the US Department of the Treasury’s Office of Foreign Assets Control issued General License 13A pursuant to Russian Harmful Foreign Activities Actions Regulations, 31 CFR part 587.  GL 13A temporarily authorizes certain administrative transactions, including the payment of taxes/fees/import duties and the purchase or receipt of permits licenses, registrations or certifications, which would otherwise be prohibited by Directive 4 issued under Executive Order 14024.  The transactions are allowed if they facilitate the “day-to-day operations” of US persons or entities in the Russian Federation.  GL 13A expires on September 30, 2022, and effectively replaces and supersedes GL 13.

Directive 4 was issued under EO 14024 by OFAC to prohibit US person from engaging in transactions involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation, and the transfer of assets to these entities or on their behalf, without first obtaining a license or authorization from OFAC.

Department of Treasury Recent Action | General License 13A | EO 14024 – Directive 4

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Licence to assign and change use: new lease with AGA and guarantee | Practical Law

Licence to assign and change use: new lease with AGA and guarantee

Practical law uk standard document w-014-3526  (approx. 57 pages).

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Authorised guarantee agreement

Practical law uk standard document 0-200-2002  (approx. 27 pages).

• Guarantees - Land and Buildings