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Inadvertent release of guarantors – More from the High Court

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15/10/2013

Earlier this year, Real Estate Matters discussed the law surrounding the unintended release of a guarantor from liability in situations where the contract he is guaranteeing is varied without his consent. Since then, the High Court has handed down a reminder that this principle is as relevant as ever.

The law

Since the nineteenth-century case of Holme v Brunskill [1] it has been settled law that a guarantor’s liability under a contract will cease where that contract is varied, unless the variation: (a) is made with the guarantor’s consent; (b) is self-evidently insubstantial; or (c) could not prejudicially affect the guarantor. The prejudicial effect on the guarantor need only be potential and need not be material [2].

In short, a guarantor’s liability extends only to the extent that he has agreed to accept. If he agrees to guarantee performance of one specific set of obligations, he cannot be held liable for a failure to perform a different set.

Topland Portfolio No. 1 Limited v Smiths News Trading Limited [3]

In Topland, a guarantor guaranteed a tenant’s obligations under a lease granted in 1981. The lease contained covenants against structural alterations to the existing buildings, and against construction of anything other than sheds and greenhouses consistent with the premises’ use as a garden centre. However, in spite of those covenants, the lease also seemed to envisage alterations and improvements being made to the premises during the lease’s term.

In 1987, the then landlord granted the tenant a licence to carry out various works, including construction of a new garden centre and a high-security boundary fence, as well as alterations to an existing warehouse and car park. The guarantor was not party to the licence and did not consent to it. In 2001 Topland became the landlord – the tenant remained throughout. In 2011, the tenant went into administration and Topland claimed against the guarantor for arrears of rent.

The court found that the works permitted by the licence were substantial, increased: “the bulk of the structures on the land”, and were not of a sort envisaged by the lease when the guarantor assumed his obligations. The greater bulk of structures on the premises increased the burden of the tenant’s repair obligations under the lease, necessarily increasing the risk of default by the tenant and, in turn, the potential extent of the guarantor’s liability. Given that the guarantor had not given consent to the licence, the rule in Holme v Brunskill operated to release the guarantor from all liability under the lease.

Practical considerations

This total release from liability may seem unfair or disproportionate to landlords, particularly in circumstances where the underlying lease contained covenants which did envisage some alterations/improvements. However the courts have, to date, generally applied the rule strictly in favour of guarantors. So it is wise to take precautions.

When granting new leases or accepting guarantees, it is good practice to include a statement to the effect that the guarantor will not be released by the grant of any licences or consents. That alone may be sufficient to oust the effect of Holme v Brunskill, but to avoid any doubt landlords should ensure that the guarantor is made party to any licence, or his express consent obtained.

When purchasing investment property where a tenant’s obligations are guaranteed by a third party, buyers should check whether any licences, consents or lease variations have been granted. If there is any possibility that the guarantor might have been released inadvertently, consider requiring a further express guarantee.

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[1](1888) 3 QBD 495
[2] Howard de Walden Estates v Pasta Place Ltd [1995] 1 EGLR 79
[3] [2013] EWHC 1445

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