Please release me: Lease guarantors and licences for alterations

Please release me: Lease guarantors and licences for alterations

Published:

Author: Matthew Kemp

The recent decision in Topland Portfolio No.1 Limited v Smiths New Trading Limited is a useful reminder to landlords to join any existing guarantor into supplemental lease documents.

The 1878 case of Holme v Brunskill established a rule that a guarantor will be discharged from its guarantee if the underlying contract is varied after the guarantee is given, except where either
. the guarantor consented to the variation
. the variation is obviously insubstantial or incapable of adversely affecting the guarantor

Facts
The lease in Topland was granted in 1981 and the guarantor guaranteed the tenant's obligations. The tenant carried out significant works including the construction of garden centre under a licence for alterations granted in 1987. The guarantor was not a party to that licence.

In 2011, the tenant went into administration. It was later dissolved and the landlord claimed all outstanding rents from the guarantor. It also required the guarantor to take a new lease of the premises for the remainder of the term.

The guarantor argued that the 1987 licence for alterations constituted a substantial variation to the terms of the lease to which it did not consent and, in view of this, it was released from liability.
The court agreed. The lease contained an absolute prohibition on alterations.

Under the terms of the licence, the lease covenants applied to the demised property, as altered by the works. This meant that the tenant's obligations - particularly those relating to repair - became more onerous and, in turn, this increased the guarantor's exposure.

In an attempt to preserve the guarantee the landlord tried to depend on the few protective provisions that the lease contained and claimed that it had shown 'forbearance' to the tenant as it had not enforced the lease covenants against alterations. This was unsuccessful.

The court said that it would be to stretch language beyond breaking point to construe 'forbearance' as including a lease variation.

The landlord was left with significant rent arrears and an untenanted property.

Comment
. The rule in Holme v Brunskill does not require a court to look into the effect of a variation on a guarantor. If a variation to the underlying contract has been made and the guarantor did not consent to it there is a real risk that it will be released from all liability.
. The Topland lease contained little in the way of protective wording intended to avoid an inadvertent release of the guarantor. Most modern leases contain more comprehensive provisions and sometimes a separate indemnity, additional to the guarantee.
. Whilst such provisions are an essential safeguard it will always be preferable not to have to depend on them. Best practice remains to join a guarantor as a party to supplemental documents, where it is feasible to do so.
. The Topland case is a useful reminder to landlords consider the position of a guarantor upon a lease event.
. Purchasers of investment property subject to occupational leases should check whether guarantors have been joined as parties to supplemental documents, as this will be relevant to the security available.