Guarantors are as much concerned with the terms of contracts that they have guaranteed as are the principals themselves, because their liability is contingent on the obligations guaranteed. Therefore, landlords must consult guarantors before varying the terms of a lease. If they fail to secure the guarantors’ consent to the changes, the guarantors will be discharged, unless it is obvious that the alteration is insubstantial or is incapable of prejudicing them: Holme v Brunskill [1877–78] 3 QBD 495.
The dangers of failing to consult guarantors before granting a tenant a licence for alterations were well-illustrated in Topland Portfolio No 1 Ltd v Smiths News Trading Ltd [2014] EWCA Civ 18; [2014] PLSCS 23. The landlord acquired a freehold investment in 2001. The previous owner had granted a lease to Do-It-All, and had taken a guarantee from its parent company. The tenant, which later became known as Payless DIY, went into administration in 2011 and was subsequently dissolved. The landlord called on the parent company to comply with its obligations under its guarantee.
The guarantor disclaimed liability on the ground that the previous owner had granted the tenant a licence for alterations for the construction of a new garden centre, to which it was not a party. It pointed to covenants in the lease prohibiting the tenant from making any alterations or additions to the premises, other than very limited ones, and cited the rule in Holme.
The landlord tried to persuade the Court of Appeal that the lease had not become more burdensome because the rent was unaffected and the lease defined the premises as including any “additions, alterations and improvements” to the property. It claimed that the guarantor must have appreciated that the tenant’s covenants would, as a result, apply, if the property was added to, altered or improved.
The Court of Appeal preferred the guarantor’s argument that it knew, when it became a party to the lease, that the tenant would not be entitled to make any additions, alterations or improvements to the property unless the landlord granted the tenant permission to do so outside the framework of the lease. In such circumstances, it was entitled to expect that its consent would be sought as well. The licence for alterations had had the clear potential to add to the obligations of both the tenant and its guarantor, in the event of any default by the tenant. Therefore, the rule in Holme was engaged.
The landlord fell back on provisions in the guarantee that protected the landlord against the effect of any “forbearance on the part of the Lessor”. It claimed that the landlord had agreed to forbear from enforcing the covenants against alterations in the lease. However, the court preferred the guarantor’s argument that the word “forbearance” applies to situations where the landlord is presented with a breach of covenant and must then decide whether to tolerate, or enforce, the covenants in a lease. The tenant was not in breach of covenant when the licence was granted. The landlord had positively authorised the work and there were no other provisions in the lease that might have preserved the guarantee. Consequently, the grant of the licence for alterations had discharged the guarantor from liability under its guarantee.
Allyson Colby is a property law consultant
