It is often the case that a third party is called upon to guarantee a tenant's obligations under a lease, which provides a landlord with some degree of comfort that it has someone to turn to in the event of a tenant's demise. The recent case of Topland Portfolio No 1 Ltd v Smiths News Trading Ltd illustrates how in some circumstances the reassurance of having a guarantor in place can be short-lived.
A lease was entered into in 1981 ("the Lease"). The tenant was WH Smith Do–It–All Ltd (then known as Payless DIY Ltd) ("the Tenant") and the guarantor was WH Smith & Son Ltd (known subsequently as Smiths News Trading Ltd) ("the Guarantor"). In 1987 a Licence for Alterations was entered into by the then landlord and the Tenant, but the Guarantor was not a party to the Licence (and did not consent to it). Topland Portfolio No 1 Ltd ("Topland") subsequently acquired the freehold interest.
The works permitted by the Licence for Alterations were substantial and extensive. They included the construction of an entire new garden centre.
The Tenant went into administration on 5 May 2011 owing in the region of £280,000 in rent. Consequently, the Landlord sought to recover the rent from the Guarantor.
The Guarantor rejected the Landlord's claim on the basis that the Licence (to which it had not been a party) had extended its obligations under the Lease in more than an insubstantial manner, increased the risk that it would become liable under the guarantee and accordingly it ought to be released from the guarantee.
In finding for the Guarantor, the Court stated that "...the important question is whether and to what extent the principal's [the Tenant's] obligation may be extended by entering the Licence... it is no answer to say that because the Surety did not himself execute the Licence he was not bound by it." The Court agreed with the Guarantor's submission that there were substantial alterations which resulted in an increase in the extent of the Tenant's repairing obligations. This increased the risk of default by the Tenant, which in turn increased the burden on the Guarantor and prejudiced its position. As a result the Court held that the Guarantor ought to be released from its obligations and was "off the hook".
One might have assumed that the Guarantor remained liable up to the point where its liability is increased. This is not the case. The Guarantor's liability was discharged entirely – there can be no partial discharge of the Guarantor's obligation.
The Court acknowledged that it is possible to draft wider guarantee clauses which can validly ensure a guarantor remains liable after alterations, but there was no such provision in this case. It also reinforced that where a guarantor consents to a variation, the variation is binding on him (but obviously that did not occur here).
The case is an important one as it not only reflects the importance of a Landlord's day-to-day dealings with an existing tenant and its guarantor (e.g. ensure the guarantor is party to variations of the lease). However, it is also serves as a "warning light" for any purchaser of a property subject to a lease – do check whether your future tenant's guarantor is still "on the hook"?
First appeared in Informer: Real Estate Newsletter - Autumn 2013
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