28 June 2013

Don't bank on guarantor in case of alterations

The message: Any material variation can discharge a guarantor.

The case: A guarantor has successfully challenged its liability to meet substantial liabilities under a 1981 lease in Topland Portfolio No 1 vs Smiths News Trading (06.06.13).

In 1981, a 35-year lease for premises in Morecambe, Lancashire, was granted. The original tenant was WH Smith Do-It-All and the guarantor was its holding company, WH Smith & Son (now known as Smiths News Trading).

Topland bought the freehold in 2001. When the tenant went into administration in 2011, it sought to hold Smiths News Trading liable for all sums outstanding and going forward.

The liability was substantial as the rent had increased to £310,000 plus VAT per year and Smiths would also have to meet all the other covenants under the lease, including repairing and decorating, and reinstatement obligations.

The lease provided that the guarantor would cover any default by the tenant and such liability would be unaffected by any neglect or forbearance by the landlord to obtain payment of the rent or enforce the covenants. But the wording did not hold Smiths liable for any variations made to the lease.

Under a Licence for Alterations entered into in 1987, a restriction on not erecting any further building had been relaxed by the landlord so the tenant could build a garden centre. The tenant would not have to pay additional rent, but would keep the extension in good repair and was liable to reinstate the premises to their former condition when the lease terminated.

Unusually, the guarantor was not a party to the licence and did not formally consent to the variation of the lease. Smiths argued that, in accordance with the law established back in 1878 in a case called Holme vs Brunskill, the effect of the variation was material and sufficient to discharge it from any further liability as guarantor, as the repairing obligations had clearly increased because of the expansion of the premises.

Topland claimed the licence simply related to a concession or forbearance at that time in relation to the extent of permitted alterations and there was the flexibility to relax the prohibition without it being a variation. It also claimed there had to be something unfair about a variation before a guarantor could be released. It said there was not only nothing unfair but Smiths, as the parent company, was aware of the variation at all times.

The court gave Topland’s arguments short shrift. It held that the extension works were originally prohibited by the lease and had only been possible by varying the lease. The variation was to the possible detriment of the guarantor, as it increased the tenant’s repairing obligations and the guarantor’s obligations if the tenant defaulted. The variation did not amount to any neglect or forbearance, so there was nothing that kept Smiths liable for the £1.5m of rent and other liabilities.

The court added that there was nothing unfair about a guarantor being released entirely where the law had been clear for years and where it would have been possible to have drafted a guarantee clause that covered such variations.

Summing up: Topland vs Smiths

  • A tenant went into administration and held its guarantor liable for outstanding rent
  • The lease had been varied to allow a new garden centre to be built, but the guarantor had not formally consented
  • This discharged the guarantor from its liabilities

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