Raymond Cooper is a Consultant Property Lawyer
Proposition: Tenants who are charities are unlikely to have power to enter into AGAs on the assignment of their leases, and trustees who do enter into AGAs could, if an assignee fails, incur personal liability.
Many (probably the vast majority) of charities in England and Wales occupy their operational premises under business leases. In some cases (again I think probably the vast majority) a lease of business premises will contain a restriction prohibiting assignment without the consent of the landlord. Almost invariably, modern leases tend to set out requirements and conditions non-compliance with which are to be a reasonable ground for the refusal of consent by the landlord. One of these conditions is often that the assigning tenant enters into an Authorised Guarantee Agreement (AGA).
AGAs were of course introduced by the Landlord and Tenant (Covenants) Act 1995 (the Act). The Act effectively abolished (in relation to “new” leases granted on or after the 1st January 1996)) the previously applicable law of privity of contract, under which the original tenant was (and still is under an “old” lease granted before 1st January 1996) liable for a breach of any of the terms of the lease, no matter how many times it may have been assigned. There was inevitably a lot of lobbying from landlord dominated organisations about this and, as is often the case, the result was something of a compromise; although on an assignment the original tenant is released from liability he can (where the lease contains a condition to the effect referred to above or the requirement is otherwise lawful) be required to enter into an AGA under which he guarantees the obligations of the assignee during the period of the assignee’s ownership of the lease.
It should be said in passing that The Code for Leasing Business Premises in England and Wales 2007 states that leases should not refer to any specific circumstances for refusal by a landlord of consent to an assignment, and in particular that AGAs should not be a requirement as a condition of consent to the assignment:-
“unless at the date of the assignment the proposed assignee, when assessed together with any proposed guarantor; is of lower financial standing than the assignor (and its guarantor), or is resident or registered overseas”
However, in practice the requirements of the Code are more often than not ignored on the grant of leases of business premises, which almost invariably require an AGA in relation to any assignment.
Where the original tenant is a charity, the question then arises of whether a charity has the power to enter into an AGA, notwithstanding any requirement in the charity’s lease. If the assignee is a body that is itself within the charity tenant’s objects of benefit (e.g. another charity with similar objects) there is no problem, but in most cases that will not apply. Whether, where it does not, a charity can enter into an AGA is partly a question of what is permitted by the charity’s constitution and partly one of general charity law.
In the case of modern incorporated charities there might conceivably be a power in the charity’s governing document to provide guarantees, but it seems unlikely. Article 5 of The Charity Commission’s model Articles of Association for a Charitable Company does not specifically confer such a power, though under it the charity “has power to do anything which is calculated to further its Object(s) or is conducive or incidental to doing so”. This is really no more than a statement of general law, and poses the question whether giving an AGA can ever be calculated, conducive or incidental to the furtherance of the charity’s objects?
I think it would be very difficult to justify a charity entering into an AGA under this sort of power, given that the primary duty of all charity trustees is to ensure that their charity’s assets are applied solely for the charity’s specific charitable purposes. Is entering into an AGA a breach of this primary duty?
It might be possible to imagine a situation where an assignment is entirely in the interests of a charity’s beneficiaries. One could imagine a case, for example, where a charity had outgrown its current premises and had an operational requirement for more space which could be met only by disposing of its existing lease. However, I think this is problematic.
Where a condition requiring an AGA is included in a lease (or is otherwise lawfully imposed – see below) and the landlord insists that the requirement is satisfied, and the charity does not have the power to comply with the landlord’s requirement, what is the position? Does the fact that the charity tenant is legally unable to comply with the landlord’s requirement entitle the charity to assign without consent on the basis that, notwithstanding what the lease says, the landlord is withholding consent unreasonably by insisting on compliance with a condition that is outside the power of the tenant? Or is it the case that (should the landlord not relent) the charity is simply unable to assign?
The lessons for those advising charities here are I think:-
(1) If forming a new charity, to ensure that the charity’s constitution specifically permits the charity to enter into AGAs (this could relate only to AGAs or be part of a wider power to give guarantees) where the landlord lawfully requires one and the assignment is in the best interests of the charity’s beneficiaries; and
(2) If advising a charity in connection with the grant to the charity of a new lease, to refuse to accept the AGA condition and rely on the basis that the client charity is simply unable to enter into that commitment (perhaps pleading in addition the provisions of the 2007 Leasehold Code).
Of course, as noted above, the omission from a lease of an automatic power to require an AGA on any assignment does not necessarily preclude the landlord from requiring an AGA as a condition to the grant of consent (where consent is required; s16(2)b of the 1995 Act). Nonetheless, in the absence of a specific provision in the lease the landlord is in a significantly weaker position.
I have no doubt there are many cases where charities assigning leases have entered into AGAs, in which case there may be an issue regarding breach of duty. If breach of duty could be established, then, in the event of the charity incurring liability under the AGA as a result of the failure of the assignee, the charity trustees could find themselves personally liable for any resulting loss.
I cannot find any direct Charity Commission guidance on this, but it is interesting to note the Commission’s guidance in relation to charities guaranteeing the liabilities of a wholly owned trading subsidiary (Section D19 of Charity Commission: Trustees, trading and tax (CC35));
“such guarantees, if given, will often be unenforceable against the charity and may expose the trustees to personal liability”
It is hard to see the difference.
