If a landlord allows a tenant to alter its premises without first consulting the guarantor then the guarantor can be released from all of its obligations. This risk has recently been confirmed in a High Court decision – Topland Portfolio No. 1 Limited v Smith News Trading Limited [2013] – which will be welcomed by businesses providing guarantees.
In the Topland case, the guarantee was contained in a lease which prohibited any structural modifications. The landlord and tenant entered into a licence allowing the tenant to alter the premises. Under the terms of the licence the tenant’s covenants in relation to order, repair and upkeep extended to the additional areas of the site created by the alterations permitted by the licence. As a result, despite the fact that the guarantor was unaware of the licence, the scope of the guarantor’s potential liability increased.
The tenant subsequently became insolvent, and as a result the landlord attempted to make a claim against the guarantor. The guarantor argued that the licence constituted an adverse and substantial variation to the terms of the lease, and that it should not be held liable under the guarantee. The High Court accepted the guarantor's argument, and released the guarantor from its responsibilities under the guarantee.
This recent case re-emphasises the importance of landlords seeking a guarantor’s consent prior to entering into any contracts or arrangements that significantly vary a lease agreement.
James Sutherland is part of our Real Estate Disputes team and regularly advise landlords, tenants and guarantors on their obligations in relation to commercial and residential property.