Summary and Implications
The Court of Appeal has confirmed that the rule concerning release of guarantors created by an 1878 case remains good law. Landlords run the risk of releasing a guarantor if a lease is varied or altered (where such change is not contemplated by the original contract), without the approval of the guarantor.
In managing portfolios, landlords should:
- consider carefully whether or not a guarantor should be consulted (and brought in to any contractual variation or alteration) whenever the obligations in a lease are altered or varied, however informally;
- evaluate portfolios of assets to ascertain whether there is any risk in respect of existing guarantees; and
- be aware that there is only a limited exception to the general rule. Only if it is immediately apparent (without enquiry) that an alteration or variation is unsubstantial, or that it can only be beneficial to the guarantor, will the guarantee remain in force if there is a variation to the principal contract.
The landlord sought to enforce the guarantee after the tenant company was dissolved
Topland was the landlord of a portfolio of commercial properties. One retail unit within the portfolio in Morecambe was let to the former Payless DIY company, with the tenant obligations in the lease guaranteed by Smiths.
In 1987, Payless was granted licence to carry out alterations to the premises. Smiths was not a party to that licence, nor gave approval to its terms.
Payless went into administration and arrears of rent subsequently accrued.
Payless was dissolved and, in 2012, Topland required Smiths to take a new lease for the remainder of the term of the Payless lease under the guarantee provisions.
The rule in Holme v Brunskill
The rule about discharge of guarantors can be traced back to an 1878 case. A farming tenant had taken a lease of 234 acres of land with a flock of 700 sheep.
The lease obliged the tenant to redeliver the flock in good condition at the end of the lease. The tenant's obligations were underwritten by a guarantor. During the course of the term, the tenant had agreed with its landlord that it would surrender part of the estate in exchange for a decrease in rent. The guarantor was unaware of this.
Even though the variation had not materially altered the tenant's obligations under the lease, the court found that the guarantor had been discharged.
The rule derived from this case can be stated as follows:
- a guarantor ought to be consulted if there is any agreement between the principals with reference to the contract guaranteed;
- if a guarantor has not consented to an alteration then he will be discharged, unless;
- it is immediately apparent without enquiry that the alteration is either: (a) unsubstantial; or (b) can only be of benefit to the guarantor.
The alteration of the contract in the Smiths' case
In the case of Smiths, the licence for alterations permitted the tenant to construct a new garden centre on the west side of the existing warehouse premises and to alter the layout of the car park. The tenant was also permitted to erect a high-security boundary fence. At the end of the term, if the landlord reasonably required, the works had to be reinstated.
The court found that Smiths had been released
The court concluded that the licence for alterations had clear potential to increase the tenant's obligations and/or the risk of default. On this basis, applying the rule in Holme v Brunskill, the Smiths' guarantee had been lost.
Lessons to be learned
A guarantor will undoubtedly seek any basis on which to escape liability under a guarantee.
Accordingly, landlords should always be cautious about varying or altering the underlying contractual position, as well as any forbearance offered to a tenant.
The test created by the rule in Holme v Brunskill is a difficult hurdle for a landlord to overcome. Prejudice to a guarantor might be broken down into "risk prejudice" and "quantum prejudice". The former is where a variation brings about an increase in the risk of a guarantee being called in. The latter is where a contractual variation brings about (or may bring about) an increase in financial liability under the contract.
If either prejudice is even potentially brought about by the change, there is a substantial risk that the guarantee will be lost.
It is clear from the recent decision that it is possible, with careful and clear wording, to seek to contract out of Holme v Brunskill. However, this is far from certain.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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