Selling a thriving business is a high-point achievement, the aspiration is a clean exit: high value, low risk. But for UK businesses trading from business premises under a lease, the apparently uncomplicated exercise of transferring the property can hide prolonged, substantial legal risk.
The situation is perilous, and it’s a risk underestimated by business owners concerned with the sale price. At Kaiser Solicitors, we are experts at safeguarding UK companies via intricate commercial transactions.
Pitfall 1: The Long-Term Liability of the Authorised Guarantee Agreement (AGA):
What is an AGA and Why is it needed?
Under the LT(C)A 1995, an original tenant who assigns a commercial lease created after 1 January 1996 is automatically discharged from all future covenants. This was intended to bring to an end the old regime of ‘privity of contract’ which produced untrammelled liability.
Yet landlords, understandably eager to preserve security, obtained the right to require an outgoing tenant to guarantee the incoming successor through an AGA. The AGA is a deed in which the outgoing tenant covenants with the landlord that the incoming tenant will fulfill the lease covenants until they lawfully assign the lease themselves.
Pitfall 2: The Involvement of Landlord Consent and ‘Unreasonable Withholding’:
Statutory Overlays: Landlord and Tenant Act 1988:
Although the landlord can refuse consent, this right is strongly qualified by the Landlord and Tenant Act 1988. This Act puts a statutory obligation on the landlord to:
– Grant consent within a reasonable time, or write to the tenant with reasons for refusing consent, or attaching conditions, within a reasonable time.
The most important factor here is the ‘unreasonably withheld’ principle. A landlord must not withhold consent for the purpose of gaining a pecuniary premium from the selling tenant.
Pitfall 3: The Perilous Path of Subletting (Underletting):
Some sellers prefer selling off the business assets but retaining the main lease, and sublet the premises to the buyer.
This method might appear to provide greater control but has its own set of risks.
Double Liability and Management Responsibility:
Through subletting, the selling company is still 100% responsible to the Head Landlord for all covenants within the Head Lease. The selling company takes up two roles:
Continuing Tenant: Responsible for rent, service charges, and repairs to the Head Landlord.
New Landlord: Residual responsibility for enforcing the sublease covenants against the buyer/subtenant.
Conclusion:
The meeting of a sale of business and the law of commercial property in the UK is one where one miscalculation can result in years of unforeseen financial and legal liability. Either assigning your lease and battling the intricacies of an Authorised Guarantee Agreement, or thinking of an underletting strategy with the double-liability threat, obtaining a clean break is the top priority.
Call us today to arrange a confidential discussion on obtaining your clean exit. Kaiser Solicitors stands ready to help.
