The grant of a licence for alterations discharged a guarantor from liability under a guarantee
It is common to see provisions in guarantees that are designed to keep guarantors on the hook and protect the recipients of guarantees against common law rules that operate to discharge guarantors from liability under their guarantees. One such rule, which causes particular difficulties for landlords, is that a material variation in the terms of a lease will release the guarantor, unless it consents to the variation or the variation is insubstantial or cannot be prejudicial to the guarantor: Holme v Brunskill [1877–78] 3 QBD 495. The court need not investigate whether the variation was insubstantial or whether the guarantor was prejudiced by it; this must be self-evident for the guarantee to survive.
The guarantee given in Topland Portfolio No 1 Ltd v Smiths News Trading Ltd [2013] EWHC 1445 (Ch); [2013] PLSCS 126 did not contain any provisions to mitigate the severity of this common law rule. Consequently, the guarantor was able to argue that the landlord had granted a licence for alterations for the construction of a new garden centre, to which it was not a party, which released it from liability under its guarantee.
The landlord tried to persuade the judge that the licence for alterations was nothing more than a concession, which did not change the contract sufficiently to discharge the guarantee. It claimed that the licence was not a variation of the original agreement because the lease defined the premises as including any “additions, alterations and improvements” to the property. It suggested that the guarantor had not been a party to the licence because the improvements would have no effect on the rent and, therefore, would not be prejudicial to the guarantor. It also relied on provisions in the guarantee that protected the landlord against the effect of any “forbearance on the part of the Lessor”, and claimed that the licence for alterations constituted a “forbearance” because the landlord had agreed not to enforce the covenants against alterations in the lease.
The judge was unimpressed. He ruled that the licence did operate to vary the original contract between the parties. The landlord had permitted work of a different order and magnitude to any alterations that might have been contemplated in the lease. The judge held that the alterations affected the tenant’s repairing and reinstatement obligations, and dismissed suggestions that the obligations need not trouble the guarantor because it did not sign the licence. The licence engaged the tenant’s obligations under the lease. Consequently, the court must consider whether this might increase the tenant’s liabilities and, therefore, those of the guarantor. The rule in Holme v Brunskill discharges a guarantor entirely where the tenant’s exposure increases; it does not operate to discharge part of the guarantor’s obligations, as the landlord was suggesting, and the court did not need to conduct a “desktop investigation” into the character of the change to establish whether it was insubstantial or if the guarantor had been prejudiced by it.
It would stretch language beyond breaking point to construe the word “forbearance” as including the grant of a licence for alterations that varied the lease and there were no other provisions that might have preserved the guarantee in this case. Consequently, the guarantor was not liable under its guarantee.
Allyson Colby is a property law consultant
