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Should a charity enter into an authorised guarantee agreement?

13 August 2013

As numerous traditional high street retailers feel the economic pinch caused by ongoing poor trading conditions and internet competition, many charities are taking advantage and are increasing the number of their retail outlets.

However, charities need to ensure that any lease takes account of the specific provisions of their own constitution.

Leases usually contain restrictions on assignment of the lease. Commonly these include a provision requiring the outgoing tenant to enter into an AGA guaranteeing the performance by the incoming tenant of the covenants and conditions contained in the lease.

For a standard non-charity retailer, this is normal. However, it is a different position for a charity which will have to establish whether it can enter into an AGA, this being determined partly by the objects within the charity’s constitution and partly by charity law.

Charity trustees cannot allow the assets of their charity to be applied for a purpose which is not in line with its specific charitable purposes. Trustees who breach this duty may be personally liable for any loss the charity may incur. If a charity wants to assign its lease to another charity then the provision of an AGA will not generally pose a difficulty. But what should the trustees do when the charity is being asked to provide an AGA to guarantee the obligations of a new tenant that is not a charity?

Presently, the position is not crystal clear and the Charity Commission does not offer any guidance. Therefore:

  • In any new lease the trustees should ensure that the charity is not obliged to accept a condition that it must enter into an AGA on assignment.
  • If a landlord refuses to agree, but the charity considers that taking a lease of the premises is important, then it should try to dilute the obligation so that it is only required to enter into an AGA if reasonable in all the circumstances.
  • Charities should consider whether to review their governing documents to specifically incorporate a power allowing the trustees to provide AGAs.
  • Where a charity wants to assign a lease then the trustees must obtain a qualified surveyor’s report in order to comply with the provisions of sections 117-123 of the Charities Act 2011.

Commercial property partner Alasdair Garbutt deals with a wide range of work in relation to sales & acquisitions, development transactions, landlord and tenant and property management matters. He has particular expertise in property investments, property management, clawback, overage, options, business leases and development and security documents.

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