Varying a lease – mind the guarantor!

Posted: 08/07/2013

The case of Topland Portfolio No 1 Limited v Smiths News Trading Limited [2013] EWHC 1445 (CH) last month provided a salient reminder that landlords need to remember to take account of guarantors when entering into licences to alter with their tenants or else common law principles may come back to haunt them.

In the case, Topland had acquired a freehold property in Morecambe in 2001. In doing so it acquired the reversionary interest in a lease dating back to 1981. The tenant was Payless DIY Limited and the guarantor was SNTL.

The tenant went into administration in May 2011 and on 15 August 2012 the tenant company was dissolved. On the same date, Topland gave notice to SNTL that it would require it to be responsible for the rental (which had been paid up to June 2011) and all other sums owing under the terms of the lease pursuant to its guarantee. On 8 October 2012 Topland gave notice to SNTL that it would be required to take a new lease for the remainder of the term.

However, in September 1987, Topland’s predecessor in title had entered into a licence for alterations with the tenant and, crucially, the guarantor had not been a party to it.

In the case of Holme v Brunskill [1878] the principle was established that a guarantor is discharged from its guarantee if the principal parties to the agreement vary it – unless the variation is insubstantial or is one which cannot be prejudicial to the guarantor.

SNTL argued that the 1987 licence for alterations constituted a variation to the terms of the lease that was not insubstantial and, therefore, they were no longer liable.

The court agreed with SNTL, noting that the alterations permitted by the licence were so extensive (among other items it permitted the construction of a new garden centre) that the variation to the original premises was '…of a different order and magnitude…' to that contemplated by the original lease.

The works carried out under the licence had therefore increased the extent of the tenant’s obligation (to keep the premises in repair for example) to a point where the variation to the lease was clearly far more than insubstantial.

Consequently, the landlord was left with significant unpaid rent arrears and no future income. Had the guarantor been a party to the licence then it would have remained liable. Although more modern leases may contain provisions attempting to tie in a guarantor irrespective of any lease variation, it remains good practice (and fail safe!) to make any guarantor a party to such a document.

Return to news headlines