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08 June 2020

Q&A: Guarantors and assured shorthold tenancies

A guarantee of an assured shorthold tenancy (AST) states that it applies to any extension and renewal of the tenancy. The tenancy term expires and it becomes a periodic monthly tenancy. Can the guarantee continue beyond the end of the fixed term of the tenancy? Or is the guarantor released from its obligations once the tenancy changes from an AST to a periodic tenancy?

References: Holme v Brunskill (1877) 3 QBD 495

Under section 5(2) of the Housing Act 1988 (HA 1988), upon the expiry of a fixed-term assured shorthold tenancy (AST), a periodic tenancy arises on the same terms and conditions. This does not apply if the tenancy comes to an end by order of the court or surrender or other action on the part of the tenant.

It is assumed for the purpose of this Q&A that HA 1988, s 5(2) applies to this tenancy. However, if that is not the case and the tenancy has been varied, the guarantee may have been released. A guarantee can be lost where changes are made (expressly or by conduct) to the underlying contract, unless the guarantor consents, or the variation is ‘self-evidently insubstantial or non-prejudicial to the guarantor’ (Holme v Brunskill).

It is also assumed that the wording of the guarantee is clear and unambiguous.

The extent of the guarantor's liability is a question of construction of the contract of guarantee. As a general rule, the terms of the guarantee will limit the guarantor’s liability to the term of the tenancy, unless the guarantee is expressed otherwise. The law does not imply an extension of the guarantee into contracts, and any words which seek to extend the guarantee beyond the contractual term must be considered.

The tenancy states that the guarantee applies to any extension or renewal of the AST. In this scenario, therefore, it is necessary to consider whether a periodic monthly tenancy arising under HA 1988, s 5(2) amounts to an ‘extension’ or ‘renewal’ of the fixed term AST in order to determine if the guarantee continues to apply. By HA 1988, s 5(3)(b), such a periodic tenancy is ‘deemed to have been granted by the person who was the landlord under the fixed-term tenancy immediately before it came to an end to the person who was then the tenant under that tenancy’.

Extension

Adopting the ordinary meaning of the words, an ‘extension’ of the fixed-term tenancy is likely to include common law or statutory extensions when the tenant remains in occupation of property once the fixed term has expired. In this scenario, as the fixed term has expired and a monthly periodic tenancy has arisen under HA 1988, s 5(2), it may be said that the resulting periodic tenancy constitutes an 'extension to the fixed term' and hence that the guarantee continues to apply. The contrary argument would be that the HA 1988, s 5(2) tenancy is a new and separate tenancy, which is not an extension of the original; the wording of HA 1988, s 5(3)(b) may support such an argument. 

Renewal

By contrast, a ‘renewal’ is likely to require the intention and active participation of the parties to enter into a new agreement, presumably for another fixed term rather than on a fundamentally different basis such as periodically. This has not happened in this scenario. However, the wording of the guarantee confirms that the guarantor would remain bound by the terms of such new tenancy, and the guarantor should remain a party to any new agreement drafted. 

Conclusion

Whether the guarantee applies is a question of interpretation of the whole document, and taking into account all the usual principles of construction. The stronger argument may be that the guarantee continues to apply to the monthly periodic tenancy as an ‘extension’ to the term, and the guarantor will remain bound by its obligations until the periodic tenancy is terminated.

For further information, see Practice Notes: Variations and guarantors and Contract interpretation - the guiding principles.


This article was written by Associate Emma Preece at Charles Russell Speechlys LLP and was first published on the Lexis Nexis Ask Forum on 14 May 2020.

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