Guarantee: “Sorry Guv we’re released!”
14 / 10 / 2013
This article clarifies the law on the release of guarantors following the variation to a lease.
Your tenant defaults. You are not worried: you have a guarantor. You send out a demand to him and the answer comes back: “We are not liable. Our liability came to an end when the lease was subsequently varied!”
Could the guarantor be right?
Yes he could, just as the guarantor successfully argued in the recent case of Topland Portfolio v Smiths News Trading, where the landlord permitted the tenant to erect a new garden centre despite the lease containing an absolute prohibition on alterations. The court held that the guarantor was completely discharged from all its obligations under the lease because the alterations had increased the scope of the tenant’s repairing obligations.
Is this a new principle of law?
No, this is an old established principle of law. In 1878 the case of Holme v Brunskill established 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 consents to the variation
- the variation is obviously insubstantial or incapable of adversely affecting the guarantor
What if the guarantee clause contains a saving of the guarantee even where the lease is varied. Will this work?
Such a provision should not be relied upon. There was no such provision in the guarantee in the Topland case but it would be most unwise to vary the lease without the guarantor’s actual consent to that particular variation.
What do I need to be wary of?
- Before you agree any variation with a tenant you need to check whether there is any present or previous guarantor that could be released by the variation.
- If you are purchasing an investment property subject to occupational leases you should check whether or not guarantors have been joined as parties to the supplemental documentation as this will be relevant to the security available to you.
- Be careful of a document entered into with the tenant which is not called a deed of variation but which nevertheless agrees to some arrangement with the tenant which falls outside the terms of the lease as it stands. This might be:
- an agreement to permit alterations which are otherwise prohibited (as with Topland);
- an agreement to extend the use of the premises;
- an agreement to a stepped rent review, where the rent review clause merely provides for the fixing of a single rent at review;
- a rent concession, such as a switch to monthly rent, if the tenant agrees to pay an administration fee in return.
Is there anything else I need to take account of?
Even if you do obtain a guarantor’s consent, where the guarantor is of a former tenant, remember that Section 18 of the Landlord and Tenant (Covenants) Act 1995 states that such a guarantor shall not be liable under any agreement to pay any amount to the extent that the amount is referable to any variation to the lease. The anti-avoidance provisions in the Act are likely to override any written consent.
Whatever supplemental deed you are entering into with your tenant always remember to check its effect on any existing guarantee provision.