Commercial lease guarantors are exposed to substantial liability — often joint and several with the tenant for rent, service charge, and all other lease obligations. When a tenant assigns, the 1995 Act requires the landlord to release the outgoing tenant from future liability but allows the landlord to require an Authorised Guarantee Agreement (AGA) guaranteeing the immediate assignee. For leases entered before 1 January 1996 (pre-1995 Act leases), the original tenant and any historic guarantors remain liable for the full term under privity of contract. Commercial landlords must structure guarantee provisions carefully at the outset and maintain enforcement discipline throughout the lease term.
Types of Guarantee in a Commercial Lease
Commercial leases use several types of guarantee, each with different risk profiles: (a) Corporate guarantee: a parent or group company guarantees the tenant's obligations — typically unlimited but limited to the tenant's obligations under the lease; particularly important where the tenant is a special purpose vehicle or newly incorporated entity; the landlord should always take a deed of guarantee on the same date as the lease; (b) Personal guarantee: an individual (director; shareholder; owner) guarantees the tenant's obligations — exposes personal assets; most effective for owner-managed business tenants; (c) Rent deposit deed: a cash deposit held by the landlord (typically 3-6 months' rent) as security for the tenant's obligations — more liquid than a guarantee but does not cover the full term; the deposit deed should include step-in rights and a clear clawback mechanism; (d) Bank guarantee or letter of credit: a bank's unconditional undertaking to pay on demand — expensive but strong security; most common for high-value leases; (e) Authorised Guarantee Agreement (AGA): a guarantee of the immediate assignee's performance given by the outgoing tenant on assignment; required by the 1995 Act as a condition of landlord's consent to assignment; different from a standard third-party guarantee; (f) For leases granted on or after 1 January 1996 (post-1995 Act), guarantors are released when the tenant is released under s.5 LT(C)A 1995 — guarantors must also be expressly released in the licence to assign.
- Corporate guarantee: parent/group company guarantees tenant — essential for SPV or newly incorporated tenants; take the deed on the same day as the lease
- Personal guarantee: exposes individual assets — most effective for owner-managed SMEs; directors should be named individually
- Rent deposit deed: cash security held by the landlord — 3-6 months' rent typical; include step-in rights, clawback, and interest provisions
- AGA: outgoing tenant guarantees the immediate assignee under post-1995 Act leases — a condition of landlord's consent to assign
- Post-1995 Act: original tenants and guarantors are released from future liability on assignment; AGA covers the immediate assignee only, not future assignees
Authorised Guarantee Agreement (AGA) — The 1995 Act Framework
The Landlord and Tenant (Covenants) Act 1995 fundamentally changed the privity of contract rules for post-1995 Act leases: (a) Tenant release on assignment: under s.5 LT(C)A 1995, when a tenant assigns a post-1995 Act lease, the outgoing tenant is automatically released from the tenant covenants of the lease from the date of assignment; this is a significant departure from the pre-1995 Act position where original tenants remained liable for the full term; (b) AGA condition: under s.16 LT(C)A 1995, the landlord can make consent to assignment conditional on the outgoing tenant entering into an AGA; the AGA guarantees the immediate assignee's performance of the tenant covenants; (c) Permitted AGA terms: the AGA can only require the outgoing tenant to: (i) guarantee the performance of the immediate assignee for the duration of the assignment; (ii) take a new tenancy of the premises if the immediate assignee defaults (an 'AGA with new tenancy obligation'); it cannot require the outgoing tenant to guarantee future assignees; (d) AGA chain: on the next assignment, the AGA automatically terminates; the new outgoing tenant can then be required to enter into a new AGA; the AGA therefore creates a chain of 'one-deep' guarantees; (e) Interaction with the guarantor's guarantor: a guarantor cannot be required to guarantee an AGA — s.16(4) LT(C)A 1995. A guarantor of the original tenant is automatically released when the original tenant is released; (f) Pre-1995 Act leases: original tenants and their guarantors remain liable for the full term under privity of contract; the landlord can pursue both the current defaulting tenant and the original tenant for arrears; in practice most pre-1995 Act leases are now on long-established terms and the original tenants/guarantors may have died or become insolvent.
- Tenant release on assignment: under 1995 Act s.5, outgoing tenant automatically released from post-1995 Act lease covenants from assignment date
- AGA condition: landlord can condition consent to assign on an AGA under s.16; the AGA guarantees the immediate assignee only
- AGA limitation: cannot guarantee future assignees; the AGA chain means only the most recent outgoing tenant guarantees the current tenant
- Guarantor release: a guarantor of the original tenant is released when the original tenant is released on assignment — the guarantee cannot survive the release of the principal obligor
- Pre-1995 Act leases: original tenant and guarantors liable for the full term under privity of contract — distinct regime from post-1995 Act leases
Guarantee Caps, Timeframes, and Release Events
Landlords often agree to cap or time-limit guarantee liability as an inducement to take a guarantor: (a) Monetary cap: liability capped at a fixed sum (e.g. 12-24 months' rent) — common in high-value commercial leases where the guarantor requires certainty of maximum exposure; the cap should expressly cover all amounts due under the lease, not just rent (i.e. service charge, insurance, dilapidations, interest); (b) Term cap: guarantee expires after a specified period (e.g. 5 years from lease commencement) — favoured by investors buying in business; the landlord should resist caps shorter than the break clause window; (c) Release on review: guarantee liability increases automatically on each rent review if the guarantee is expressed as a cap relative to the initial rent — the deed should address whether the cap increases proportionally; (d) Landlord's notice requirement: s.17 LT(C)A 1995 requires a landlord who wishes to recover a fixed charge (rent, service charge, insurance) from a former tenant or guarantor under a pre-1995 Act lease to serve a notice within 6 months of the charge becoming due — failure to serve extinguishes liability for that charge; this obligation applies to pre-1995 Act leases AND to AGAs under post-1995 Act leases; (e) Overriding lease right: a former tenant or guarantor who pays a fixed charge under s.17 can require the landlord to grant an overriding lease (s.19 LT(C)A 1995) — an intermediate tenancy sitting above the current tenant, giving the former tenant/guarantor the ability to manage and eventually recoup their outlay; (f) Automatic release: guarantee liability ends on surrender of the lease; the court should not grant a new tenancy under LTA 1954 against a former guarantor's consent.
- Monetary cap: agree a fixed-sum cap on guarantee liability (e.g. 12-24 months' rent plus service charge and insurance); ensure cap covers all sums due, not just rent
- s.17 notice: landlord must serve s.17 notice within 6 months to preserve right to recover fixed charges from former tenant/guarantor under pre-1995 Act lease or AGA
- Overriding lease right: former tenant/guarantor who pays under s.17 can demand an overriding lease — powerful right allowing them to manage or sublease the property
- Automatic release: guarantee terminates on surrender of the lease; review guarantee terms on any variation to check whether guarantor has been released
- Rent review impact: cap expressed in monetary terms may not increase with rent review — check the guarantee deed and consider express escalation clause
Enforcing Against a Commercial Lease Guarantor
Practical steps for a commercial landlord seeking to enforce a guarantee: (a) Check the guarantee deed: verify that the guarantor's obligations are unconditional, that the guarantee is a primary obligation (not a see-to-it guarantee that requires a judgment against the tenant first), and that there is no requirement to exhaust remedies against the tenant before pursuing the guarantor; (b) Check s.17 notice obligations: for pre-1995 Act leases and AGAs under post-1995 Act leases, serve a s.17 notice on the guarantor within 6 months of the fixed charge falling due; send by recorded delivery to the last known address; (c) Pre-action: send a formal demand by first-class post to the guarantor's last known address; allow reasonable time for response (14-21 days); (d) County court or High Court proceedings: issue a claim for the debt in the appropriate court (High Court for claims over £100,000; county court below); guarantors often settle on service of proceedings; (e) Charging order: if a money judgment is obtained, apply for a charging order on the guarantor's property — particularly effective where the guarantor is a director with personal property; (f) Overriding lease trap: be aware that if the guarantor pays the outstanding fixed charges and then requires an overriding lease, the landlord will owe the obligation to grant it — consider the implications before commencing enforcement; (g) Corporate guarantor insolvency: a corporate guarantor in administration or liquidation triggers the automatic moratorium — the landlord will need leave of the court to issue or continue proceedings; file a proof of debt in the insolvency proceedings for the guaranteed liability.
- Check guarantee type: primary obligation (no need to exhaust remedies against tenant) vs secondary guarantee (judgment against tenant required first) — insist on primary obligation
- s.17 notice: serve within 6 months of fixed charge falling due; failure extinguishes that charge against the guarantor permanently
- Formal demand: send written demand with 14-21 day response window before issuing proceedings; document all correspondence
- Charging order: most effective enforcement tool against a personal guarantor with UK property; survives the guarantor's death
- Corporate guarantor insolvency: moratorium applies in administration and liquidation; file proof of debt and consider whether an AGA or overriding lease is more valuable
Frequently asked questions
What is an Authorised Guarantee Agreement (AGA) in a commercial lease?+
An Authorised Guarantee Agreement (AGA) is a guarantee given by an outgoing tenant to the landlord when assigning a post-1995 Act commercial lease. Under the Landlord and Tenant (Covenants) Act 1995 s.16, the landlord can make consent to assignment conditional on the outgoing tenant entering into an AGA. The AGA guarantees the immediate assignee's performance of the tenant covenants for so long as the assignee holds the lease. The outgoing tenant's AGA terminates when the assignee in turn assigns the lease (and can be required to enter into their own AGA). An AGA cannot guarantee the performance of future assignees — only the immediate one.
Is a commercial lease guarantor automatically released when the tenant assigns?+
For post-1995 Act leases: yes. Under the Landlord and Tenant (Covenants) Act 1995 s.24(2), when the principal tenant is released from the tenant covenants, any guarantor of that tenant is also released. The landlord cannot require a guarantor to remain bound beyond the release of the principal obligor. The exception is the AGA: the outgoing tenant (not the third-party guarantor) gives an AGA on each assignment. For pre-1995 Act leases: the original tenant and guarantors remain bound by privity of contract for the full term, regardless of assignments.
What is the section 17 notice requirement for commercial lease guarantors?+
Under s.17 Landlord and Tenant (Covenants) Act 1995, a landlord who wishes to recover a 'fixed charge' (rent, service charge, insurance) from a former tenant or guarantor under a pre-1995 Act lease (or from a party who gave an AGA under a post-1995 Act lease) must serve a notice within 6 months of the charge becoming due. The notice must be served in a prescribed or substantially similar form. Failure to serve the s.17 notice within 6 months permanently extinguishes the landlord's right to recover that particular fixed charge from the former tenant or guarantor.
Can a commercial landlord require a rent deposit instead of a guarantee?+
Yes. A rent deposit deed is an alternative or supplement to a personal or corporate guarantee. The landlord holds a cash deposit (typically 3-6 months' rent plus service charge) as security against the tenant's default. Unlike a guarantee, the deposit is immediately realisable without issuing legal proceedings. The deposit deed should include provisions for: top-up obligations (to maintain the deposit after a draw-down), interest allocation, return of the deposit at lease expiry or earlier on meeting specified conditions, and step-in rights if the tenant's business is sold. A well-drafted rent deposit deed is often more practically enforceable than a guarantee from a newly incorporated company.
What happens if a commercial lease guarantor becomes insolvent?+
If a corporate guarantor enters administration or liquidation, the automatic moratorium under the Insolvency Act 1986 applies — the landlord cannot commence or continue legal proceedings against the guarantor without leave of the court (in administration) or without a provable debt procedure (in liquidation). The landlord should file a proof of debt in the insolvency proceedings for the full outstanding liability. If an individual guarantor becomes bankrupt, the landlord's right to recover from the guarantor's estate is preserved as an unsecured creditor. If the guarantor has given a charging order on their property, the landlord may have priority over other unsecured creditors in respect of that property.