Granting alterations licence discharged guarantor from liability, High Court rules

Out-Law News | 18 Jun 2013 | 9:32 am | 3 min. read

Granting a licence for alterations without the consent of the guarantor can be enough to discharge the guarantor's liability under the lease, the High Court has said.

In a recent case, the guarantor was able to escape liability under common law rules that discharge liability where there has been a "material variation" in the terms of the lease. This meant that the landlord was not able to claim rent and interest due under the lease from the guarantor after the tenant went out of business.

The landlord, Topland, had invested in a property that was let to WH Smith's now-defunct subsidiary Payless DIY in 1981. In 1987, Payless entered into a licence with the previous landlord allowing it to construct a new garden centre. Payless went into administration in 2011, and was dissolved in 2012.

In her judgment, Deputy Judge Alison Foster said that the parent company, now known as Smiths News Trading, was right to argue that, since it was not a party to the licence and did not consent to it, it was released from its liability under the guarantee. The work covered by the licence was "not in the contemplation of" the tenant at the time the lease was guaranteed, she said.

"In my judgement it cannot properly be said that these are works of a type already contemplated in the lease: they are of a different order and magnitude," the judge said.

"It was self-evident that where there were substantial alterations that increased the bulk of the structures on the land, there was inevitably an increase in the scope of the repairing obligations and the increase of burdens upon the tenant would necessarily increase the risk of default and the burden on the surety," she said.

Under the case law, the general rule is that a guarantor's liability is linked with the underlying obligations of the tenant. The guarantee will be discharged if there has been any substantial variation in the terms of the lease without the consent of the guarantor. There is an exception in cases where it is "self-evident" that the variation is "insubstantial" or "cannot be prejudicial to the guarantor". It is not up to the court to consider whether or not there is actual prejudice or damage, or whether the variation is substantial.

The landlord had tried to argue that "forbearance" provisions contained in the lease applied and that the landlord had agreed to forbear from enforcing the covenants against alterations in the lease against the tenant. However, the judge said that the "imaginative" arguments of the landlord "stretched the proviso beyond breaking point".

"In all the circumstances, the licence operated to vary the lease," she said. "Forbearance was not apt to encompass a contract by way of licence that effected a variation to the lease. Accordingly, nothing in the proviso operated to maintain [the guarantor] 'on the hook'," she said.

Property law expert Graham Halsall of Pinsent Masons, the law firm behind Out-Law.com, said that the case "does not really tell us anything new". In most cases, the lease would be worded in such a way as to keep the guarantor "on the hook" in a similar situation, he said.

"However, it is a helpful reminder of an important legal principle and of the importance of involving the guarantor in any variations to the lease," he said.

"Practitioners understand the general effect of the case law to mean that if an agreement is varied without the guarantor's consent, the guarantor is released completely, unless it is self-evident that the guarantor is not adversely affected. However, the key consideration is not the simple fact that the agreement is varied, but whether or not the variation enlarges the obligations of the guarantor. It is this obstacle that the landlord in this case was unable to overcome - despite some clever and attractive arguments advanced on its behalf," he said.

He added that one of the more interesting arguments made by the landlord was that the works were "of a type contemplated by the lease" and so did not enlarge the guarantor's obligations. Although the court disagreed, the judge "appeared to have left open the possibility of this sort of argument prevailing" in future cases, assuming the works in question were contemplated by the lease, he said.

"Such circumstances, I suspect, will be unusual and, in any case, the key question is always likely to be whether, and to what extent, the guarantor's obligations are enlarged," he said.