The Guarantors Obligations
Court of Appeal Ruling: Guarantors Released From Obligations When Alterations To Property Were Made Without Its Consent
Guarantors Released From Obligations When Alterations To Property Were Made Without Its Consent
In a ruling issued by the Court of Appeal in January 2014, the court upheld a previous High Court ruling that guarantors are relieved from their responsibilities under a lease contract when the terms of the lease were changed without the guarantor’s consent, and the new terms could potentially increase the guarantor’s burden.
The implications of guarantors release from obligations can be far reaching
The decision has implications for both landlords and tenants, and it underlines the long-held legal principle that guarantors cannot be placed in a situation where their obligations may increase as a result of alterations to contracts made between landlords and tenants without the guarantor being first made aware of the proposed changes, and secondly, giving consent to the new terms.
The background to the ruling
The January ruling was in the matter of Topland versus Smith News Trading Limited, and related to a property leased by Payless DIY, a subsidiary of Smith News Trading Limited (formerly WH Smith & Son Ltd.).
In 1981, PAT (Pensions) Limited sold the leasehold to a property to WH Smith Do-It-All Ltd. The lessee later changed its name to Payless DIY Ltd. The parent company, WH Smith, acted as surety for the lease. In 2001, Topland bought the reversion from PAT.
When Payless was dissolved in 2012, it owed Topland more than £281,000 in unpaid rent, and Topland sent notice to Smith’s requiring it to become the lessee for the remainder of the lease’s term. However, Smith’s argued that it was no longer obliged to meet its obligations as guarantor because of material changes that had been made to the lease terms.
This came about when Payless sought permission from the original landlords, PAT, to make alterations to the property. Payless wanted to build a new garden centre at the property, and PAT agreed, issuing a licence for Payless to carry out the alterations. Neither party made Smiths aware of the proposed changes, or the agreement, and Smiths consequently did not give consent to the changes. Both the High Court and the Court of Appeal found in Smiths’ favour.
landlords need to be certain over what they agree to
The case highlights the importance of getting sound legal advice before entering into any commercial lease agreement. In the aforementioned case, Topland suffered substantial financial loss. It lost the rent and interest due from Payless, and will have had significant legal costs on top.
From this case, and other similar cases, it is clear than those who purchase freehold properties with sitting tenants need to check not only whether or not the tenants have sureties that will protect the landlord, but also whether or not anything has happened during the course of the tenancy, which could have released the guarantor from any obligations.
Landlords need to check with legal professionals
It should also be a warning to landlords to consult with legal professionals before authorizing any material changes to the existing lease terms, in case those changes have the effect of releasing the guarantor from the surety offered. The bottom line is probably that guarantor consent should always be sought and given before changes are made.
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