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Articles

How Restaurants Are Doubly Penalized by Authorised Guarantee Agreements

At their lowest moment — already unable to make rent — a restaurant owner can be kicked again while down. The Authorised Guarantee Agreement specifies that an outgoing tenant can be held responsible for some obligations of an incoming tenant.

Popularized in English courts (on which U.S. judiciary is based) for many leases signed after January 1996, this landlord-friendly clause is commonly included within many commercial rental contracts.

Not sure if your contract includes an Authorised Guarantee Agreement? Now is as good a time as ever to investigate.

Note: Authorized is the customary U.S. spelling; authorised is the customary U.K. spelling. Both terms are interchangeable.

A tenant who wishes to “sublet” (assign) a lease that contains an Authorized Guarantee Agreement will have responsibility for the assignee’s performance of the contractual obligations for a specified length of time, usually a few months.

What does that mean in practice?

Consider Various Eateries, a restaurant operator with ambiance brands like Coppa Club and Strada. Due to the collapse of in-person dining during COVID-19, Various Eateries could no longer afford rent at 13 locations.

Being a responsible tenant, it found another tenant to sublet the remaining months of its leases. Various Eateries moved out. New tenants moved in.

Problem solved. Right?

Well, those new tenants were burger chain Byron, as well as Zizzi’s by Azzurri Group. Both assignees were restaurants by necessity. The buildings were zoned for dining and equipped with kitchens and dining fixtures.

As the reader might already be guessing, shortly after moving in, the coronavirus did not ease. Byron and Zizzi’s started running out of cash. Tragically, both of the assignees are now in bankruptcy-like voluntary business administration.

So the landlord called Hugh Osmond, an owner of Various Eateries. They wanted rent. Yes, rent for locations that he no longer occupied.

“It would have been millions,” Osmond said. He barely remembered signing that Authorized Guarantee Agreement.

Osmond says AGAs are an “unbelievable feature of the market that in healthy times doesn’t matter much, but under COVID it’s a chain reaction.”

The Financial Times outlined similar AGA nightmares being experienced today by Yo! Sushi, PizzaExpress (see Restaurant Engine’s latest article on PizzaExpress), Brasserie Bar Company, and many other restaurants. Reporters say that under many AGA clauses, landlords are permitted to collect a staggering six months of rent arrears — yes, from previous tenants, who were not occupying that space during the time in question.

For questions pertaining to your lease, seek the advice of a certified attorney with an active license in your area of residence.

Photo by Scott Graham on Unsplash

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