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How lease variations can release guarantors

July 10th, 2014

Guarantors give landlords valuable additional security when it comes to leases, but you risk losing this protection if you do not get their consent before agreeing to a lease variation.

Topland Portfolio No 1 Limited discovered this to their cost in a 2004 dispute with Smiths News Trading Limited (2004) in relation to a guarantee on a leased property. 

The dispute

In this particular case, the tenant had carried out a number of alterations to the property without the consent of the landlord (this was required under the terms of the lease). The landlord subsequently granted retrospective consent in a ‘licence to alter’, legitimising the alterations. 

The Landlord agreed to the works on the basis the tenant entered into additional obligations in connection with the carrying out of these works.  No approach was made by the Landlord to the guarantor for consent to the various changes needed to the lease brought about by these additional obligations.

The tenant’s guarantor argued that it was released from its obligations under the guarantee on the basis that the lease, as varied, imposed additional potentially onerous obligations on the tenant which it had not agreed to.

The Court’s Decision

The Court held that the licence did alter the terms of the lease and that the variation would impose greater obligations on the tenant and its guarantor than was previously the case.  As a consequence, the guarantor was released from its guarantee obligations.

The decision of the Court was in line with the general legal position regarding the liability of guarantors – that the guarantor will automatically be released unless:-

  • the guarantor consents to the variation
  • the variation is either insubstantial or incapable of adversely affecting the guarantor.

Protecting your interests as a landlord

The case illustrates that it is crucial for the landlords to obtain the consent of any guarantors before any changes to a lease are agreed, and that such consent is documented in writing, whether in a licence to alter or other legal document.

Not all variations will prejudice a guarantor so it is important to take legal advice at an early stage in the process.