Retaining a Guarantor

How sure are you that a guarantor remains liable under a lease? 

During negotiations for the grant of a lease for commercial premises a landlord will work hard, in conjunction with commercial agents, to gain the benefit of a guarantee (whether from an individual or from a company) for a tenant’s liabilities under the terms of a lease.  In some cases the deal will only proceed where the landlord has the benefit of a worthwhile guarantee.  The retention of the benefit of the guarantee can be, and sometimes actually is, an essential part of the on-going relationship between a commercial landlord and its tenant.

Landlords must therefore, in their dealings with tenants, be aware of the rule established by the case of Holme v Brunskill in 1878 (which is still very much good law):  landlords must consult guarantors before agreeing a variation of the lease with a tenant. Any failure to obtain written consent from the guarantor to a variation may mean the guarantor is discharged immediately from all liabilities under the lease.

The only caveat allowed by the general rule is that if the alteration is

(1)   insubstantial or

(2)   incapable of prejudicing the guarantor

then the rule will not apply.

However, whether a change prejudices the guarantor, or actually is insubstantial, will be a decision for a court (in the worst case scenario) on an individual basis.

Landlords may only become aware that they can no longer rely on the guarantee some years after a variation of a lease, such a variation not having been authorised by a guarantor; usually when the landlord comes to attempt to enforce the guarantee (a nasty surprise!). This may even mean that a landlord who has purchased a property with the benefit of a commercial lease faces the loss of a guarantor, on whom financial due diligence has been carried out, for reasons of oversight by the previous owner (the previous landlord).

A case in point is the recent Court of Appeal case of Topland Portfolio No1 Limited v Smiths News Trading Limited [2014]. The landlord sought to enforce a valuable guarantee only to find that the grant of a licence for alterations (entered into without the guarantor’s consent in that case) to the tenant by a former landlord determined the guarantor’s liability. The Court of Appeal was content that the licence for alterations in this case acted prejudicially against the guarantor because at the time of entering into the lease the guarantor was aware that no alterations could be made to the property without the landlord’s consent and, therefore, would have expected to be a party to that licence as well.

The business world is a pragmatic environment but the potential for loss to a landlord in such cases is too great to take the risk. A landlord should always seek advice on any variation to a lease (however small) and how this variation will impact on any guarantor – otherwise the same landlord may find that a commercial lease is not the same investment as the landlord first thought!

To find out more information speak to Darren Millis or call us on 01908 689316.