A landlord grants a lease to a tenant and a guarantee is provided for the tenant’s obligations by a guarantor. The landlord can rest easy knowing that if the tenant gets into financial difficulty, it can rely upon the covenant given by the guarantor. Or can it?
If the primary contract (whether or not a lease) is varied without involving the guarantor, doubts may be raised whether the guarantee can be relied upon. Known as the rule in Holme v Brunskill, dating from 1877, it is subject to an important qualification outlined by the Court of Appeal in the 2005 case of Triodos Bank NV v Dobbs. A guarantee may survive a variation which schedules an existing obligation but is less likely to survive a variation which increases liability or is not within the anticipation of the original agreement.
These principles featured prominently in the recent case of Topland Portfolio Number One Ltd v Smiths News Trading Ltd. The Topland case concerned a 1981 lease. A licence for alterations was entered into in 1987 to relax the absolute prohibition on structural alterations but also creating obligations on the part of the tenant which were ultimately considered by the court to be more onerous than those within the original lease. The guarantor hadn’t been involved in the grant of the licence for alterations in 1987 and didn’t consent to it.
Some twenty years later the tenant was in financial difficulty and owed significant rent arrears. The landlord sought to rely upon the guarantee. Applying the rule in Holme v Brunskill, the Court of Appeal held that the guarantee was released by virtue of the licence for alterations. Topland weren’t entitled to pursue the parent company WH Smith & Son Lt (now known as Smiths News Trading Ltd).
The case doesn’t create new law but serves as a clear warning to any party with the benefit of a guarantee. When considering a tenant’s request to vary the terms of a lease or other document (whether formally or informally), the landlord should have a keen eye on the implications of those alterations upon any guarantor. If there is any doubt as to whether the variation will materially affect the potential liability of the guarantor (there invariably will be), the guarantor should be joined into a document formalising the arrangements.
If you wish to discuss any of the issues raised in this Blog, please contact me.