In this month’s potted guide, Jonathan Seitler QC guides practitioners through the basics of the law relating to the accidental release of guarantors by variation in the principal contract, otherwise known as the rule in Holme v Brunskill
Holme v Brunskill checklist
- Why is this an issue?
- What is the rule in Holme v Brunskill?
- What is the rationale for the rule?
- What sort of variation engages the rule in Holme v Brunskill?
- When will a variation of the lease discharge a guarantor entirely and when will it instead limit liability only to its original, pre-variation level?
- Is it possible to exclude the rule in Holme v Brunskill?
- Does the rule catch all underwriting of tenants’ obligations?
- What is the best way to avoid a release of guarantors under the rule in Holme v Brunskill?
Why is this an issue?
Like the law relating to the need to strictly comply with conditions of break clauses and the law of waiver of a right to forfeit, the accidental release of guarantors – otherwise known as the rule in Holme v Brunskill (1878) 3 QBD 495 – is one which, quite rightly, sends shivers down the spines of solicitors and surveyors. This is because it makes big and bad legal things happen without anybody ever having intended such unfortunate outcomes.
What is the rule in Holme v Brunskill?
The basic principle is this: the landlord (L) grants a lease to the tenant (T). The guarantor (G) guarantees T’s obligations to L. Then what happens is that L and T vary the lease in a way which, on the face of it, makes T’s obligations to L more onerous, and they do that without reference to G.
The rule in Holme v Brunskill says that in those circumstances G is released entirely from the guarantee. Nobody intended it and nobody necessarily wanted it. It is undoubtedly a disaster for L and a windfall for G. But it happens – a lot: see, for instance, North Shore Ventures Ltd v Anstead Holdings Inc and others [2011] EWCA Civ 230.
And when it does, L’s solicitors and surveyors, who failed to rope G into the variation of the lease (by making G a party to a deed of variation), will have some tough questions to face – and probably a claim from L.
What is the rationale for the rule?
The common sense of the rule is that G is entitled not to have its burdens extended without its consent and, indeed, is entitled to be released if those burdens change in that way, because G agreed to guarantee T’s obligations under the lease, not any other basket of obligations.
It is regarded as unfair therefore if T incurs a greater financial obligation, and therefore a greater risk of defaulting on its payments, and thereby the risk is increased of G being called upon, because of something done without reference to G and without its consent.
Cases in which G has been discharged from liability on this basis include circumstances where L licensed additional lavatories in the premises (Selous Street Properties Ltd v Oronel Fabrics Ltd and others [1984] 1 EGLR 50); where L obtained a licence from the tenant to place cladding on the demised premises (West Horndon Industrial Park Ltd v Phoenix Timber Group plc [1995] 1 EGLR 77); and where T procured a licence to sell wine, then operate an off-licence, and then to use adjoining premises as a fire-escape (Howard de Walden Estates Ltd v Pasta Place Ltd and others [1995] 1 EGLR 79). In each case, the variation exposed T, and therefore G, to a higher rent and/or an increase in repair and reinstatement obligations.
A particularly stark example of the operation of the rule is provided by Topland Portfolio No 1 Ltd v Smiths News Trading Ltd [2014] EWCA Civ 18; [2014] 1 EGLR 38 in which G was released from all its obligations as guarantor because its consent had not been obtained to a licence for alterations which were seen as potentially increasing the scope of T’s obligations. The release of G was particularly harsh on L, who had acquired the reversion many years after, and therefore in ignorance of, the offending licence.
What sort of variation engages the rule in Holme v Brunskill?
In order to bring about a release under the rule in Holme v Brunskill, the variation must be one capable on a “desktop analysis” of increasing G’s liabilities as guarantor. The test is not whether any party thinks that such liabilities have increased but whether, as a matter of law, objectively, they have increased.
This means, though, that where the “headroom” for any such increase is built in, either to the lease (the variation being pursuant, say, to a rent review mechanism that was always present in the lease) or to the guarantee (because it is an “all-monies” guarantee and was always envisaged to be capable of increase), any such increase in G’s liabilities as guarantor will not release it; nothing unexpected will actually have gone on behind G’s back: see Wittman (UK) Ltd v Willdav Engineering SA [2007] EWCA Civ 521.
When will a variation of the lease discharge a guarantor entirely and when will it instead limit liability only to its original, pre-variation level?
This depends on the distinction between a variation and the assumption by T of a new obligation.
Where what has happened is truly a variation of a term on the lease and it occurs without reference to G, there will be a complete and total discharge of G’s obligations, because G will not have guaranteed those obligations as varied and the old original obligations will no longer be extant.
However, where T simply takes on a new obligation, in addition to its existing obligations under the lease, no variation as such can be said to have occurred; G will continue to guarantee the original obligations, though not of course the new ones: see Bank of Scotland plc v Makris and another [2009] EWHC 3869 (Ch).
Is it possible to exclude the rule in Holme v Brunskill?
In theory it is, but attempts to do so seem to run aground more often than not in the reported cases.
The most common way to seek to exclude the rule is to include a provision in the lease – to which G is a party – saying that no variation of the lease will discharge G.
This, though, is easier said than done. Such clauses tend to be construed against G and the courts often read them as just not responding to the variation which has occurred: see, for instance, Triodos Bank NV v Dobbs [2005] EWCA Civ 630, in which Chadwick LJ explained why:
“It is important to keep in mind, also, that the guarantor is not to be taken to have agreed that his liability under the guarantee would be increased or made more onerous by a subsequent agreement made between… [L and T]… (to which he is not party) unless there are clear words in the guarantee which show that he did agree to be bound to a more onerous obligation in the future imposed without further reference to him.”
Rarely do exclusion clauses hit such heights of prescient accuracy, especially as, like all guarantee obligations, they are construed contra proferentem against the person who would seek to enforce them (L).
The exclusion clause in Topland, for instance, failed to prevent the release of G despite it providing expressly for G to remain as guarantor in the event of L’s “forbearance” or “giving of time”, both of which were potentially apt to describe the licence granted to allow works in the face of an absolute covenant prohibiting alterations, because L thereby exercised forbearance from strictly enforcing that absolute covenant and gave time (until the end of the lease) for T to reinstate.
Does the rule catch all underwriting of tenants’ obligations?
No. It only applies when G’s obligations are under what can properly be classified a contract of guarantee. It does not apply where G’s obligations are by way of indemnity.
This can sometimes be a fine distinction to draw in practice. The key question is whether G’s liability to L is an original, direct one, not dependent on T’s default (in which case it is an indemnity); or whether it is dependent on the default of T (in which case it is truly a guarantee): see Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch) and Associated British Ports v Ferryways NV [2009] EWCA Civ 189.
The distinction turns on a construction of the terms of the lease, including the guarantee. From the point of view of L, the safest course to take in the lease is to describe G’s obligations both as a guarantee and an indemnity.
What is the best way to avoid a release of guarantors under the rule in Holme v Brunskill?
Make G a party to a deed of variation and have G therefore on the record as expressly consenting to the variation.
Leading authorities
Holme v Brunskill (1878) 3 QBD 495
Selous Street Properties Ltd v Oronel Fabrics Ltd and others [1984] 1 EGLR 50
Howard de Walden Estates Ltd v Pasta Place Ltd and others [1995] 1 EGLR 79
Triodos Bank NV v Dobbs [2005] EWCA Civ 630
Topland Portfolio No 1 Ltd v Smiths News Trading Ltd [2014] EWCA Civ 18; [2014] 1 EGLR 38
Jonathan Seitler QC is a barrister at Wilberforce Chambers
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