We recently encountered an interesting scenario where a tenant was looking to transfer (‘assign’) a lease to another member of its group.
What’s interesting about that, you might ask?
The original tenant was guaranteed by its parent company and the parent company was also looking to guarantee the assignee.
What’s wrong with that, you might ask?
Well, the law categorically prohibits this type of arrangement on the basis that a guarantor should not remain ‘on the hook’ after the original tenant has left. This is fine in most cases, but it does pose a problem where (as in this case) the existing guarantor specifically wants to guarantee the incoming tenant.
So, what are the solutions?
Surrender the existing lease and grant a brand new lease to the incoming tenant (backed by any guarantor they choose). For a landlord this is the ideal scenario, but for the tenant there may be SDLT implications.
2. Back-to-back assignment
Assign the lease to an intermediary, and then assign it from that person to the desired tenant (again, backed by a guarantor of their choice). In theory this is a sound approach, but it remains to be tested in a genuine real-world scenario.
Where the sole purpose of the back-to-back assignment is to dodge the rule, there is a danger that the arrangement could be viewed as a sham.
The current tenant could simply sublet to the incoming tenant, rather than assigning the lease. Both tenants could then be backed by the same guarantor if they wish. Again, there may be SDLT implications to consider.
The original tenant will be expected to provide a guarantee for the incoming tenant (known as an ‘AGA’). The guarantor will, therefore, remain on the hook to guarantee the original tenant’s AGA (hence the term, ‘GAGA’). Problems may arise if, for example, there is an issue with the validity of the AGA.
5. Rent deposit
In some circumstances, it may be more appropriate or convenient to dispense with the guarantee altogether and simply take a substantial rent deposit from the incoming tenant up front.
As ever, the approach to take will vary on a case by case basis.