Guarantors’ liability - Court of Appeal confirms position

The Court of Appeal has recently had cause to look at guarantees and whether a guarantor under a lease is released as a result of not being made party to subsequent agreements relating to the lease – in this case a licence for alterations. The case is Topland Portfolio No.1 Limited v Smiths News Trading Limited [2014] EWCA Civ 18 and the Court of Appeal upheld the High Court’s decision. Our previous Law-Now briefing “A cautionary tale – the guarantor who got away” explains the details of the first instance decision.

The Court of Appeal decision once again confirms the common law position that a guarantor can be released from liability where a contract is altered without its consent, if the alteration is either not insubstantial or could be prejudicial to the guarantor. The decision also provided clarification on the meaning of forbearance, a common word in guarantee provisions.

A brief summary of the facts; the landlord consented to some alterations which were not otherwise permitted under the terms of the lease. The guarantor was not a party to the licence for alterations and therefore argued that, on the tenant’s dissolution, it was not liable under the terms of the guarantee. The High Court agreed that the additional alterations varied the lease and had the potential to make the tenant’s (and therefore the guarantor’s) obligations more onerous. The guarantor had been released as a result. The Court of Appeal agreed.

The covenant in the lease absolutely prohibited alterations, accordingly no alterations could be made unless the landlord consented to these. The guarantor was entitled to assume it would also be asked for its consent in such a case. He was not and therefore upon the grant of the consent to alter, the guarantor was released.

In addition it was held that forbearance means a failure to enforce provisions, not a positive consent. There was no failure to enforce; the tenant had not been in breach of the covenant, as the landlord had provided its prior authorisation for the alterations.

This decision reminds landlords of the importance of ensuring guarantors are joined as parties to ancillary lease documentation if the underlying obligations are being varied.

Co-author: Helen Cooke ([email protected])