At the end of a lease, a landlord claimed damages for breach of the tenant's repairing covenant. The lease contained a provision stipulating that disputes be referred to arbitration. The arbitrator held that the tenant's guarantor was liable in damages for the dilapidations. The guarantor sought permission in the High Count to appeal that arbitration award, under section 69(2)(b) of the Arbitration Act 1996, on the ground that no proper demand for payment had been served on the guarantor.
The guarantee had been given as part of a licence to assign the lease. The appeal was based on clause 3 of the licence, under which the guarantor covenanted that, for so long as the tenant remained liable under the lease, the guarantor would pay to the landlord "on demand" all losses, damages, costs and expenses occasioned by a breach of the tenant's covenants under the lease. Although the landlord's solicitors had corresponded with the solicitors acting for the tenant and the guarantor regarding dilapidations liability, the guarantor alleged that this did not amount to a demand in accordance with clause 3.
The landlord relied on this correspondence, coupled with the fact that the guarantor had been a party to the court proceedings to appoint the arbitrator, as evidence of a demand having been duly made.
The arbitrator considered that a valid demand had been served. He held that, to determine this question, it was appropriate to apply the test in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd. In other words, would a reasonable recipient of the correspondence in question be clear that a demand was being made?
The High Court ruled that the application of the Mannai test was clearly correct. The application of that test to the facts turned on the particular documents in the case. This was not a question of general public importance which would merit the granting of leave to appeal.
However, the court went on to add that, in its view, no demand was required at all. Under clause 2 of the licence, the tenant and the guarantor jointly and severally covenanted that the tenant would observe and perform the covenants on the part of the tenant in the lease. This imposed liability on the guarantor as principal obligor, without the need for a demand.
The reference to a demand in Clause 3 did not detract from that conclusion. In any event, once the issue of whether a demand was needed had been raised, the landlord's solicitors served a formal demand on the guarantor shortly before the arbitration hearing. The court concluded that this was valid and that the landlord could have applied to amend its statement of case in the arbitration accordingly.
Things to consider
Whether it is necessary to make a demand on a guarantor before enforcing the guarantee depends on the terms of the guarantee provisions. These should therefore be reviewed in each individual case. However, many leases will provide for the liability of the guarantor to be as a "principal debtor". The effect of this is to make the guarantor liable as if it were his own debt. Where this wording is included, there will usually be no need to serve a demand on the guarantor before enforcing payment.
Hodsall v Hanbury