Landlords Beware the Time Limits for Enforcing Authorised Guarantee Agreement

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Landlords Beware the Time Limits for Enforcing Authorised Guarantee Agreement

The COVID-19 pandemic and the ensuing lockdown continues to have a dramatic effect on the UK economy.

We are seeing many tenants who were unable to pay their rent in the March quarter and some tenants who are outright refusing to pay whether they can or not. At the same time, emergency legislation introduced by the Government has, for the timebeing at least, seriously curtailed many of the enforcement methods normally available to Landlords. There is currently a ban on re-taking possession of property, restrictions on the use of Commercial Rent Arrears Recovery. New and wide ranging restrictions on the use of Statutory Demands and Winding Up Petitions are due to come into effect later on this month.  In the meantime, the June quarter day is fast approaching.

One option that remains open to some Landlords is to seek to recover the rent, service charge and other sums from the original tenant via an “Authorised Guarantee Agreement” or “AGA”.   You might have an AGA where:

  1. the relevant lease was granted after 01 January 1996;
  2. the lease has been assigned (e.g. the current tenant is not the original tenant); and
  3. at the point at which the lease was transferred from the previous tenant to the current tenant, an AGA was completed.

Under an AGA the previous tenant will have guaranteed the obligations of the current tenant, so that if the current tenant defaults you can look to recover the rent and other sums from the previous tenant.

However, before you can enforce an Authorised Guarantee Agreement against the previous tenant, you must have served them with a “Section 17 Notice”. This Notice must be in the prescribed form and it must set out details of the sum that is due. If you cannot ascertain the total amount that will be due (e.g. because it is an estimated service charge and the final accounts have not been completed) then the Notice must state that the total liability could be greater and a further Notice must then be served within 3 months of the total amount being finally determined.

Crucially, there is a strict time limit for serving an initial Section 17 Notice. It must be served within 6 months of the sum claimed becoming due under the lease. If this deadline is missed, then the previous tenant will not be liable for that sum. You must continue to serve Section 17 Notices as and when further sums become due. This means that Landlords only have until September to serve a Section 17 Notice in respect of monies that fell due in the March quarter and only have until Christmas to serve a Section 17 Notice in respect of monies that fall due in June quarter.

Finally, it is important to note that a previous tenant served with a Section 17 Notice has the option, when they pay the sums claimed, to demand an “Overriding Lease”. The effect of this is that the previous tenant will become the Landlord’s direct tenant and the Landlord of the current, defaulting tenant. The previous tenant can then look to get rid of the defaulting tenant either by occupying the property itself or finding a new tenant. A Landlord must be prepared to accept this outcome before they serve a Section 17 Notice.

Given the strict time limits and prescribed forms, we would also recommend that a Section 17 Notice is drafted and served by a solicitor.

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