It is a common assumption that on assignment (the technical term for the transfer of a lease) the tenant ceases to have liability under the lease.
The reality is that it is usually (but not always) the case that an outgoing tenant (whether a charity or not) is obliged to guarantee the performance of the lease by the person to whom it assigns the lease. This type of guarantee is called an Authorised Guarantee Agreement (AGAs).
AGAs are a common feature of commercial leases, however, there are specific legal difficulties with charities giving AGAs. This article briefly sets out the relevant issues for charity trustees to consider.
(Note that AGAs are a feature of commercial leases. It is technically possible for an AGA to be used in a residential lease situation but this would be very unusual for obvious reasons. When we refer to a ‘lease’ in this article we mean a commercial lease.)
In order to explain why AGAs exist, it is necessary to very briefly set the legal background. AGAs were introduced by the Landlord and Tenant (Covenants) Act 1995. Prior to implementation of the 1995 Act, the original and any successor tenants of a lease remained liable to the landlord for the entire duration of the lease, regardless of whether the lease had been assigned at any point. This generally remains the position for any commercial leases entered into before 1 January 1996 (old leases). In practice, this issue was (and still is, for old leases) dealt with by way of the assignee tenant giving the assignor (the person assigning) tenant an indemnity.
The 1995 Act overhauled landlord and tenant law so that (generally speaking) a tenant of a ‘new lease’ (post 1 January 1996) is automatically released from its obligations under that lease on assignment. However, the 1995 Act provides a mechanism which enables the landlord to require that an AGA is given to the landlord by the tenant who is seeking to assign the lease. This preserves the liability of the outgoing tenant until the next person assigns the lease (at which stage the outgoing tenant’s liability will drop away and the assignee will give the landlord an AGA in the event of any assignment of the lease, and so on) (see Fig. 1). The legal position regarding the extent of a landlord’s obligation to give consent to an assignment and the conditions which may be attached to that consent (including AGAs) is complex and is beyond the scope of this article. It is, however, fair to say that it is very common for a tenant who is seeking to assign its lease to be required to give an AGA to its former landlord in respect of the performance of the lease by its assignee.
Fig. 1: assignment of a new lease
Where the tenant looking to assign the lease is a charity, the provisions of the 1995 Act and the specific wording in the lease will apply as they would to any tenant. However, the provision of an AGA by a charity presents difficulties in charity law.
Charity trustees may only act in accordance with their powers under the charity’s governing document. Therefore, if charity trustees allow the charity to guarantee another party’s obligations under a lease which is arguably no longer relevant to the charity’s specific charitable purposes in circumstances where they do not have a specific power to do this, this could be construed as a breach of duty. The Charity Commission has not published guidance on this specific topic but its general view on charities giving guarantees is that:
“… they will be unenforceable against the charity and may expose trustees to personal liability.”
The Charity Commission sets out the role of charity trustees as follows:
“They have and must accept ultimate responsibility for directing the affairs of a charity, and ensuring that it is solvent, well-run and delivering the charitable outcomes for the benefit of the public for which it has been set up.”
The Commission also advises that the general duties of charity trustees when acquiring a lease for their charity include:
“Taking reasonable steps to ensure that they understand the obligations to which they will be subject under the lease and on specialised matters, appropriate professional advisers should be consulted (the cost of taking professional advice can be met by the charity).”
The Charity Commission’s general guidance on acquiring land (including leases) as a charity can be found here. On the other hand, if the charity trustees were to refuse to provide an AGA on assignment in circumstances where the landlord is entitled to call for one, this could entitle the landlord to withhold consent to the assignment, in which case the charity might be unable to divest itself of the lease. Trustees who allow their charity to pay rent for space that is surplus to requirements could equally be in breach of their duty to ensure that the charity’s assets are applied to furthering its charitable objects.
We suggest that charity trustees consider the following points in relation to AGAs and leases generally:
- Check/amend the governing document
If the trustees are authorised by the charity’s governing document to give AGAs (on the basis they are a routine feature of commercial leases) and if they exercise that authority in the best interests of the charity then it is unlikely they will be found to have acted in breach of duty. This could be done as part of an overhaul of outdated governing documents to bring them up to date with current best practice. This is definitely worth looking at if your charity has a portfolio of commercial leases.
- Negotiate the lease
At the drafting stage: It is possible for a charity’s lease to be drafted so that the charity is not required to give an AGA on any assignment. Alternatively, (and perhaps more realistically) the obligation to give an AGA could be less absolute, so that this is only required where it is ‘reasonable’ for the landlord to require it. For example, where the charity may be seeking to assign the lease to a person who is less likely to be able to comply with the terms of the lease.
At the point of requesting licence to assign: Even if the charity is looking to assign an existing lease and the terms of that lease already contain an absolute obligation to give an AGA, the trustees could try to persuade the landlord not to require one, on the basis that the charity cannot (if not permitted by its governing document) or should not be asked to give an AGA. Many landlords with a social conscience will accept this argument or may accept alternative security, such as a rent deposit or bond under which the charity’s exposure could be ring fenced.
- Appoint an independent surveyor
The assignment of a lease is a disposition of an interest in charity land which triggers the requirement to comply with sections 117-121 of the Charities Act 2011 (for non-exempt charities), and the trustees must obtain and consider written advice from a qualified surveyor in accordance with the 1992 regulations. The Act does not distinguish between leases which might be considered valuable and those which might be considered a liability. The surveyor is required to advise on all the terms of the disposal and so this should also include advice on any requirement for an AGA. The trustees must consider that advice and decide that they are satisfied that the terms of the disposal are the best that can be reasonably obtained for the charity. The relevant board minutes could record that the trustees have considered the commercial benefits versus the drawbacks of entering into an AGA on an assignment of a lease in order to show that the trustees were acting with reasonable care and skill. It would be difficult to see how in practice the Charity Commission would find the trustees in breach of their duty in these circumstances.
This article is necessarily a brief summary of the relevant issues which can be very complex. Specific advice should be sought in each case. For further information, please contact Louisa Saunders or a member of our Commercial Property Team.
This article is from the January 2019 issue of Essential Trustee, our newsletter for charity trustees and senior management. To download the latest issue, please visit the newsletter section of our website. Law covered as at January 2019.
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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2019.