Thursday, 13 June 2013

Guarantors - Don't Let Them Off the Hook!

A recent case* demonstrates how you can lose the benefit of a lease guarantor if you're not careful when entering into further supplemental documents - in this instance a licence for alterations.

The lease was entered into in 1981 between the landlord, the tenant and a guarantor.

A few years later, in 1987, the tenant extended the property and carried out various works, and a licence for alterations was entered into.

The freehold was sold in 2001 to a new landlord. In 2011 the tenant went into administration and was then dissolved in 2012.

After the tenant had been dissolved, the landlord notified the guarantor that it was now responsible for the rent and other payments owed under the lease, and followed this up with a notice requiring the guarantor to take a new lease for the remainder of the term.

The guarantor refused, saying it had been released from its liability as guarantor because it had not been a party to the 1987 licence for alterations, which had varied the lease.

The lease had contained an absolute prohibition of any alterations.

Once the works had been carried out pursuant to the licence, the tenant's obligations, and therefore those of the guarantor too, had become more onerous because the tenant's covenants (repair, cleaning, yielding up) now applied to the extended and altered premises.

Because the guarantor had not entered into the licence for alterations consenting to the works, it was released under common law from all liability under the lease.

There's nothing new in this - but it shows why in more modern leases there are usually provisions designed to make sure the guarantor will not be released by any variations made to the lease, even if they are made without the guarantor's consent.

It's important therefore to check your lease guarantees.

Whatever they may say however, it's also wise to join in the guarantor to all supplemental licences, deeds and variations.

*Topland Portfolio No. 1 Limited v Smiths News Trading Limited [2013] EWHC 1445 (CH) - with acknowledgement to CMS Cameron Mckenna for summary.

Photo by Nomadic Lass via Flickr

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