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Landlords – don’t let your guarantor get away!

27 February 2014

Whilst the worst of the recession is hopefully over, according to the government Insolvency Service, insolvencies remain uncomfortably high. As a landlord, the last thing you want to do is release your tenant's guarantor from its obligations by mistake! How can this happen?

In fact, as a recent case has shown it can occur all too easily through something as simple as failing to ensure an existing guarantor is party to a licence for alterations.

Learn from past mistakes

Landlords have been reminded of the importance of making guarantors party to all supplemental documents relating to a lease.  The recent Court of Appeal decision of Topland Portfolio No.1 Limited v Smiths News Trading Limited [1] involved a licence for alterations, although the point affects all subsidiary documents, licences to assign, variation deeds, rent review memoranda etc.

The Topland case concerned a lease granted in 1981 to which the defendant was guarantor. The lease contained an absolute prohibition on the erection of further buildings or the making of structural alterations to the property.

Before the claimant became landlord in 2001, the previous landlord granted the tenant a licence for alterations to carry out works to the property. The defendant guarantor was not party to the licence and its consent to the licence was not obtained.

In May 2011, the tenant went into administration and later that year the lease was disclaimed. In early 2012, the claimant brought a claim against the defendant, as guarantor of the tenant, in respect of rent arrears and other monies owing under the lease.

The defendant claimed that despite the lease specifically stating that tenant improvements to the property would not be taken into account in relation to rent reviews, the licence had enlarged its obligations under the lease.

The defendant claimed that the alterations had become part of the premises and therefore subject to covenants and conditions of the lease.  This placed greater burden on the tenant and consequently on themselves as guarantor.

The Court of Appeal reaffirmed the earlier High Court decision and held that the licence had the clear potential to increase the defendant's obligations in the event of the tenant's default.  The extensions were prohibited by the lease and therefore the only way they could be carried out was through varying the terms of the lease.

Accordingly, applying the 19th Century decision of Holme v Brunskill [2] the defendant was discharged from its obligations as guarantor under the lease.

Lay all your cards on the table

This case serves as a stark reminder to landlords to ensure guarantors are party to all ancillary documentation to the lease.

Whilst this case confirms the common law position, most modern leases include an express provision that attempts to prevent guarantors from discharging their liability in the event of a variation to the underlying lease.

Despite this, it should still be considered best practice to make guarantors party to ancillary documents to prevent any difficulties in the future.

[1] [2004] EWCA Civ 18
[2] [1877] 3 QBD 495

This article was written by Mark Smith.

For more information please contact Mark on +44 (0)20 7427 6722 or mark.smith@crsblaw.com.