Section 4 of the Statute of Frauds 1677 provides that guarantees must be in writing and must be signed by or on behalf of the guarantors. On the grant of a lease, landlords usually go one step further and ensure that the guarantee is executed as a deed.
However, Trustees of Beardsley Theobalds Retirement Benefit Scheme v Yardley [2011] EWHC 1380 (QB); [2012] PLSCS 43 suggests that landlords may need to take additional precautions before accepting guarantees from individuals. The guarantor claimed that he entered into the guarantee under the undue influence of a superior, without being offered or taking independent legal advice. He also relied on the fact that he was asked to sign the document “as a witness”. Consequently, he had not realised that he was giving a guarantee.
The case provides us with a rare example of the circumstances in which the courts will allow a party to repudiate a document on the grounds that he did not know what he was signing. The court accepted that the guarantor had genuinely and reasonably believed that he was witnessing the signatures of others and decided that he was not bound by his guarantee.
The decision will trouble landlords because the court agreed that the guarantee was also invalid because it was procured as a result of undue influence. The document was signed at the request of a superior that the guarantor trusted. The guarantor did not have any commercial or employment-related interest in the transaction and should have been given the opportunity to read the document and discuss it with a solicitor.
The guarantor had been – and the tenant led the landlord to believe that he was still – a company director, but the judge was unimpressed. He also refused to accept the landlord’s pleas of ignorance of the undue influence exercised over the guarantor. An on-line search at Companies’ House would have revealed that the guarantor was not a board director and, as a result, was not privy to the company’s financial affairs.
The judge also noted that the landlord and its advisors knew that the tenant was in a precarious financial position. His comments suggest that it would be advisable to check an individual’s status and financial position before accepting a guarantee, especially where the tenant has a dubious covenant.
The decision also highlights the importance of obtaining informed consent from individual guarantors before accepting guarantees. A landlord can satisfy this requirement by obtaining written confirmation from guarantors that they are aware of the risks they are running and have agreed to provide a guarantee. In addition, guarantors should be required to provide a solicitor’s certificate confirming that they have been given appropriate advice before executing the guarantee – or a signed waiver confirming that they do not wish to consult a lawyer.
Landlords should also think twice if there is delay between execution and completion of a lease, especially if guarantors were expecting to complete the transaction immediately and completion is delayed as a result of the tenant’s cash flow difficulties. The judge suggested that the guarantors should be informed so that they can consider whether to withdraw in the light of any changes that increase the risks they are accepting.
Allyson Colby is a property law consultant
