Commercial tenants, with the landlords consent, not to be unreasonably withheld, can assign their lease (transfer it) to a third party (new tenant) on application.
A common condition of the landlord giving their consent to an assignment is that their existing (outgoing) tenant guarantees the incoming tenant’s liabilities under the lease, in what is known as an AGA, an “authorised guarantee agreement”.
This arrangement ensures the landlords security in the knowledge that if the new tenant fails to meet its obligations in some way, the existing tenant steps in again. However, 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.
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 knowing that in this case EMI originally distributed her music.
It all means that 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 that tenant’s guarantor under the GAGA.
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.
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.
The court 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.