Guarantors Avoiding Liability

A recent Court of Appeal decision highlights the need for careful drafting of leases and commercial contracts to avoid the inadvertent release of a surety when dealing with licences for alterations or other amendments to the original contract.  Helen Porter, Associate Solicitor, advises on the latest Court of Appeal decision on strict covenants and sureties’ liabilities.

When drafting a lease, the tenant’s covenants can be strict and require landlord’s absolute discretion whether to grant consent for an alteration.  Alternatively, they can be qualified and where they are not expressly stated to be subject to reasonableness,  section 19 of the Landlord and Tenant Act 1927 allows that consent to improvements, where provided for in the lease, cannot be unreasonably withheld.

In Topland Portfolio No.1 Ltd v Smith News Trading Ltd [2014], the alterations clause in the lease was strict and did not allow for structural alterations by the tenant.  In September 1987, the landlord gave consent to major alterations to allow for the construction of a new garden centre in the grounds (although it could have refused under the lease).  The tenant’s surety to the lease was not a party to the licence for alterations and did not provide consent.

The tenant subsequently went into administration.  The landlord sought to pursue the surety for rent arrears.  The surety successfully relied on a 19th century rule that where the terms of a contract are varied in such a way which adversely affects them, the surety will avoid liability unless they had agreed to the variation.

This decision provides helpful guidance and acts as a useful reminder to landlords and others relying on sureties (also known as guarantors) that they must get the surety’s consent when dealing with licences for alterations or other substantial changes to the contract.  Where that is not possible but the landlord wants to agree to a tenant’s request for alterations (where it does not need to), it is advised that the landlord should only give consent on the basis that an alternative surety is provided.

However, to avoid the situation arising in the first place, the lease should be drafted without strict clauses and instead use clauses requiring consent to be given based on reasonableness. It could then be argued that a potential change in the future would have been in the contemplation of the parties, including the surety, at the outset.  It is also possible to draft the guarantee provision with an express statement that changes to the contract or underlying commercial arrangements will not affect the surety’s liability and that their consent is not required.

For more advice you can contact Helen on 02380 717717, email helenporter@warnergoodman.co.uk or visit the section of the website here.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.