Sellers of a leasehold dental practice – key things you need to know about Authorised Guaranteed Agreements!!
Where the owner of a dental practice occupies the property under a lease, and there is a significant number of years left to run on the term, the seller and the buyer of the dental practice may decide to assign the seller’s interest in the lease to the buyer.
The owner of the dental practice will be required to obtain consent of the landlord to assign its interest in the lease to the buyer. The landlord’s consent is given by writing in a document called a Licence to Assign. Where the lease is a ‘new lease’ for the purposes of the Landlord and Tenant (Covenants) Act 1995 (entered into after 1 January 1996) the landlord may request an authorised guarantee agreement (AGA) as a condition of giving its consent to the assignment of the lease. It is usual that the AGA is incorporated into the Licence to Assign, alternatively it will be a separate document.
An AGA is an agreement which places an obligation on the outgoing seller/tenant (assignor) to guarantee the performance by the new tenant (assignee) of the tenant lease covenants contained in the lease. This would include (but is not limited to) payment of rent and other outgoings, and compliance with the repair and decoration covenants.
If the assignee fails to perform the tenant covenants in the lease, the AGA allows the landlord to pursue the assignor under the terms of the AGA for remedy of the breach. In addition, the AGA may require that the assignor takes a new lease for the residue of the original term of the lease (on the same terms as the existing lease), or payment of a certain number of months’ rent instead, should the tenant’s breach mean that the lease is terminated.
The assignor’s liability under the AGA will continue until the lease term comes to an end or when the assignee assigns the lease to another party, whichever is sooner.
It is commonly found that sellers of dental practices are not aware of the reality or implications of their obligations under an AGA. However, it is possible that a request can be made to the Landlord to dispense with an AGA or at least limit it to a shorter period, where the assignee is of sufficient financial standing and has strong covenant strength to take over the lease obligations. Alternatively, the Landlord may be encouraged to take a rent deposit from the incoming tenant rather than pursue the AGA.
AGAs are common in leases of commercial property, however it is vitally important that both the seller and buyer of a dental practice understand their legal obligations before entering into an AGA or a new lease.
Should you need any assistance with the above issues please contact our specialist commercial property lawyers.
