In the current economic climate, where doubts about covenant strength are increasingly commonplace, directors guarantees provide an important source of comfort to Landlords.

It’s always been good practice to ensure that any guarantor clearly understood the implications (and risks) of a guarantee.  The implications of failing to obtain this confirmation were highlighted in the recent case of Beardsley Theobalds Retirement  Benefit Scheme -v- Yardley.  The lead director misled the Landlord to believe that a former director remained on the board of the tenant company and was prepared to provide a guarantee.  The events which then took place involved the former director signing the guarantee without any clear understanding as to what the document entailed.  When the Landlord sought to enforce the guarantee, the former director, predictably, sought to extract itself from the obligations assumed pursuant to the guarantee.

The Court held that since the Landlord knew of the Tenant’s financial difficulties, it was only entitled to rely upon the guarantee where it had satisfied the following:

• that the guarantor had provided the guarantee willingly;

• an acknowledgement had been obtained from the guarantor that it had agreed to act as such; and

• it had evidence the guarantor understood the risks associated with entering into the guarantee.

The Court held these tests hadn’t been satisfied and consequently the Landlord wasn’t entitled to enforce the guarantee.

The clear message is that any doubts about the financial position of a party from whom a guarantee is being sought need to be flagged and care needs to be taken to ensure that any guarantor is clear as to the liability which it will assume pursuant to the guarantee.

If you require any further information on the points raised in this blog or wish to discuss any issues within it, please contact Mark Withers at mark.withers@parissmith.co.uk