Assigning a Commercial Lease and the Pitfalls, Part 1
Authorised Guarantee Agreement (AGA)
Introduction:- Most people, when they decide to take the plunge and become Self Employed in a Retail Business, end up taking a Commercial Lease, unless they have enough money to buy a Freehold.
By Retail, this includes licensed, catering, accommodation, dry goods, clothing etc., it also includes manufacturing.
A solicitor will brief you on the basics of your responsibilities on taking a commercial lease and very few stress the onerous responsibilities when you assign it.
They give you a copy of the lease to read and digest, at that stage you are nearly committed to take on your new career or project and assume that thousands of small business people have taken this step before you and survived.
A lot does depend on the Landlord, private landlords are often a lot easier to negotiate with, large companies can make things very difficult and costly.
Firstly always have a survey with photographs and agree this in writing with the landlord or his representative.
I made this mistake when I took a lease from a private landlord on a lock-up sandwich bar, there was nothing to it apart from a basement that had not been used for forty years, the freehold was sold to a large property company, who threw the book at me when I went to assign the lease with historic dilapidations in the basement, I couldn’t prove a thing because I did not have a survey.
Secondly always ask your solicitor about anything that you don’t understand in the lease, don’t let him tell you that it’s a standard commercial lease, it mat well be, but you still need to understand your commitment when you assign the lease.
AGA’s:-Privity of Contract is a very nasty clause, fortunately it was banned some years ago in new Commercial Leases and replaced by the Authorised Guarantee Agreement (AGA), it may still exist in some old leases.
Privity of Contract makes the assigning lessee responsible for all the new lessees until the conclusion of the lease in simple terms.
The AGA (Authorised Guarantee Agreement) makes the assigning lessee responsible for the duration of the new lessee and is released only when the lease is assigned to another lessee.
I had the local Licensing Officer ask me whether I could stop a Pub Company from taking an elderly couples bungalow after assigning their Pub Co lease about eight years before, because the lessees had gone bankrupt, we did manage to stop the Pub Co.
At the time the Pub Co’s were increasing rents to unrealistic levels and lessees were and are struggling, the new legislation is now having some effect on rental levels, but a vast amount of damage was done to good licensees, who have now left the industry and many that are left are struggling to make profits that vaguely equate to the enormous amount of hours that they work.
The landlord insists on references etc. on any new lessee, yet avoid any financial responsibility, because they can legally recover any of their losses from the assigning lessee, unless the lease has expired.
If you are a partnership or sole trader you can and will be hounded by certain companies for any shortfall caused by your assignee, so it is essential that you are happy with the financial state of your assignee and their ability, not that it is guarantee of their business ability.
If you have a Limited Company for the purpose of leasing a commercial property and assign, then close down the company the landlord can do nothing to recover any shortfall by the assignee, unless they have one or all of the Directors of the Ltd. Company underwriting any shortfall, which is to be avoided.
Certain lessees with hard nosed landlords, have assigned the lease then quit the country, certain property owning companies have long memories unfortunately.
In this computer and Internet Age people can be very traceable.
I personally think the AGA should be dropped from all commercial leases, those with Limited Companies can walk away, partnerships and sole traders cannot with the law as it stands at present.
Some Pub Co’s will allow you to buy out of the AGA, it has now become a revenue source and the price can vary from one company to another.
Looking at the AGA logically, if a lessee can buy themselves out of it, the AGA has minimal practical value to the Landlord except to extract additional cash from the hapless lessee.
The AGA in my opinion should be removed from all commercial leases where domestic accommodation is involved and families live on the premises.
Click on this link for legal information on AGA’s