The Court of Appeal recently affirmed last year’s High Court decision that a licence for alterations granted to a tenant without the consent of its guarantor released the guarantor.
The case concerned a 35 year lease of a DIY superstore. W H Smith Do-it-all Ltd was the tenant and Smiths News Trading Limited stood as guarantor. Topland was the Landlord. The tenant went into administration in 2011 and the administrators disclaimed the lease. Arrears of rent accrued and the landlord called upon the guarantor to pay the arrears and take up a new lease for the remainder of the term. The guarantor argued that it was released from its obligations as a result of a licence to alter entered into without its consent.
The relevant terms of the lease were as follows:
In 1987 the tenant sought permission to build a new garden centre on the west side of an existing warehouse. The landlord consented by way of a licence for alterations, allowing the tenant to open up one side of the warehouse, construct the new garden centre and alter the layout of the existing car park. It was accepted that the licence amounted to a variation of the lease (as it allowed the tenant to carry out works which were outside the scope of the lease).
The guarantor argued that:
The court referred to the longstanding case of Holme v Brunskill  which established the rule that a guarantor is discharged from its obligations under a guarantee where the underlying contract is varied after the guarantee is given unless:
The court agreed with the guarantor; the licence had increased the guarantor’s obligations under the lease and it had therefore been released.
The landlord appealed and was unsuccessful on a number of grounds. First, Topland argued that there had been no increase in the tenant's obligations as a result of the licence, because the definition of the "demised premises" in the lease incorporated additions, alterations and improvements to the property. The Court of Appeal disagreed. The guarantor had guaranteed a lease under which no alterations, additions or improvements could be made without going outside the framework of the lease. The court said if such consent was sought by the tenant “the Surety was entitled to expect that its consent would be sought as well”. They went on to say that “the licence had clear potential…to increase the obligations on the Lessee, and hence on the Surety in the event of the lessee’s default”. As a result, the rule in Holme v Brunskill  had been triggered.
The landlord also argued that the licence fell within the guarantor saving provisions in the lease. The guarantor saving provisions in the Lease were not comprehensive and only applied:
Topland argued that, because the lease prohibited alterations and additions to the property (except for the erection of sheds and greenhouses), the grant of the licence amounted to forbearance (as it effectively sanctioned what would otherwise have been a breach). Again, the court disagreed. The forbearance proviso in the lease required a failure to enforce a breach; the grant of the licence did not amount to “forbearance” as the tenant was never in breach.
Lastly, Topland argued that granting the licence amounted to the giving of time by the landlord (and so fell within the guarantee saving provisions). They argued that the licence postponed the date on which the covenant against alterations was enforced. This argument also failed. As the tenant had not been not in breach of covenant when the licence was granted, it could not be said that the licence postponed the time when the landlord was entitled to ask the tenant to remove the works; rather the licence granted the tenant permission to construct the works.
The availability of a guarantor often underpins the decision to grant a lease and obviously impacts the value of a landlord’s investment. The inadvertent release of a guarantor can have disastrous consequences. It has long been the case that lease variations have the potential to release a guarantor and it is essential that steps are taken to reduce the risk of inadvertent release: