Whenever a guarantor is party to a lease, it is critical that any subsequent changes to the lease are correctly documented and the guarantor has signed up to any such variations. In the recent well reported case of Topland Portfolio No. 1 Ltd v Smiths News Trading Ltd the Court of Appeal held that a guarantor had been released from its obligations under a lease as it had not been a party, nor consented, to a licence for alterations
Critical to the decision was the fact that the obligations in the licence to alter had the potential to increase the tenant’s obligations (and therefore also potentially increased the guarantor’s obligations in event of the tenant’s default). This was because the alterations were substantial and would mean that there would be additional cost at the end of the lease to reinstate the property.
This reinforces a well established principle in law that if a lease is varied after a guarantee has been given, the guarantor’s liability will be discharged unless either:
- the guarantor consents to the variation; or
- the variation is insubstantial or incapable of adversely affecting the guarantor.
If the guarantor has not consented to an alteration, the parties can spend significant time and cost trying to establish if the variation is substantial or not. To avoid such a scenario, it is key to ensure that if a landlord and tenant vary a lease, firstly those variations are documented and secondly the guarantor is made party to those changes. There can be no doubt then that the guarantee remains in place.
- If you manage a portfolio of assets for a landlord or hold a number of leases review those leases to check if any guarantors have been inadvertently released from their obligations by a subsequent variation. Any such discrepancies could then be picked up on renewal.
- Consider taking a rent deposit at the start of a lease instead of a guarantee. It removes any doubt if a lease is varied.
- Document any variations to a lease and ensure the guarantor is party to them.