Blog - 04/02/2014
Edwin Coe Blog – Guarantee Discharged by Licence for Alterations
It is very difficult for guarantors to get out of a guarantee. This is because the guarantee is normally drafted in such a way as to exclude all of the guarantor’s legal and equitable rights. However, sometimes a guarantor escapes liability and this happened recently in the case of Topland Portfolio No 1 Limited v Smiths News Trading Limited.
This concerned the lease of a garden centre. The original lease was granted in 1981 but in 1987 licence to alter was granted by the landlord at the time. The alterations were substantial and permitted the addition of a new garden centre. Under the licence for alterations the premises had to be reinstated at the end of the lease if requested. Unfortunately the tenant went into administration in 2011 and as a result the landlord looked to the defendant as guarantor, to pay arrears of rent and to take a new lease for the remainder of the term.
The guarantor argued that it had been released from all liability under the guarantee as a result of the licence for alterations, as it had not consented or been a party to the licence. The landlord relied on a clause in the lease to the effect that failure by the landlord to enforce the performance of any covenant in the lease would not release the guarantor.
The Court of Appeal held the guarantor had been discharged as a result of the licence for alterations. The guarantor would have known when it entered into the guarantee that its potential liability could not be increased as a result of any alterations to the property, since these could not be made without the consent of the landlord. The Court of Appeal held that the guarantor could expect that its consent would be requested if there were to be alterations or improvements to the property. The licence for alterations had the effect of increasing the obligations of the tenant to the landlord and in turn of the guarantor if the tenant was unable to meet these. Accordingly, the variation in the extent of the potential liability had the effect of discharging the guarantee.
The provision in the lease that the liability of the guarantor would not be affected by any neglect or forbearance by the landlord to enforce any covenant was of no help to the landlord. This related to a decision that the landlord might take not to enforce a covenant against a tenant who was in breach of covenant, and that was different from what had happened here. There had been no forbearance by the landlord in respect of the alterations since they had been carried out in accordance with a licence for alterations. The tenant had not been in breach of covenant in making the alterations.
The moral, perhaps, from this case is that where a guarantor is facing a claim from a landlord, all the relevant facts and documents should be looked at, because there may be the possibility of the guarantee being discharged.
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