In the current economic climate, landlords are increasingly likely to need to call upon guarantors to pay the rent of defaulting tenants under licences to assign. The recent case of Greene King plc v Quisine Restaurants Ltd and Others1 highlights the issues that can be caused if the landlord fails to comply with its own obligations under the licence.

The Facts

Greene King plc granted a sub-lease of a nightclub in Cardiff to Quisine Restaurants Limited (QR). Mr Nazar Shasha (NS) was the sole director and shareholder of QR. In 2007, QR assigned the lease to Mr Stephen Dite (SD).

As part of the licence to assign, QR guaranteed that:

  1. SD would pay the rents and observe the covenants in the underlease; and
  2. Should SD default/fail to comply, QR would pay the rents and ensure observation of the covenants, and would indemnify Greene King against its losses and costs of non-payment or non-observation.

NS in turn guaranteed QR’s obligations under the licence.

Clause 8 of the licence provided that Greene King would “use all reasonable endeavours to give written notice to [NS] each and every time the rents…are more than two months in arrear”.

SD defaulted on the rent payments almost immediately following assignment of the lease. Greene King recovered the first six months’ arrears from the rent deposit provided by SD, and in December 2008 sent a notice to QR and NS requiring them to pay rent arrears of £78,000 under the licence to assign. At this point the arrears had been outstanding for up to 12 months. Further notices were sent and in June 2010 Greene King began proceedings for recovery of the rent arrears from QR and NS. At no point was notice specifically given under clause 8 of the licence.

NS and QR argued that, because clause 8 had not been complied with, their liability to pay the arrears had not been triggered. Alternatively they argued that notice under clause 8 was a fundamental term of the contract so that, if it had not been given, they were entitled to treat the contract as being void. At first instance, the Judge held that compliance with clause 8 was not a condition precedent to Greene King being able to recover arrears from NS and QR, nor was it a fundamental term of the contract.

The Court of Appeal agreed. They held that:

  • The wording of the licence did not specifically state that compliance with clause 8 was a condition precedent to the liability of QR to pay the rents. Instead clause 8 imposed a separate obligation on Greene King;
  • The obligation in clause 8 itself was not entirely clear and did not impose an absolute obligation on Greene King to notify NS of the rent arrears, which gave rise to an inference that it was not a fundamental term of the contract;
  • Even had Greene King complied with clause 8, QR and NS would have had limited options to rectify the situation. They had no legal control over SD and no real way of forcing him to pay the rent;
  • The benefit that would accrue to NS and QR if their position was correct was disproportionate to the value of the benefits the clause was meant to achieve for NS;
  • The benefit of clause 8 was enjoyed by NS alone and not by QR, which was the entity guaranteeing SD’s covenants.

Conclusion

This is a good decision for landlords seeking the enforcement of guarantees under licences to assign, because it shows that not every breach of the landlord’s obligations will allow the guarantor to avoid its liability.

However, it should be borne in mind that Greene King’s failure to comply with the terms of the licence necessitated a (presumably costly) Court case and a delay of two to four years in the recovery of the rents owed. In other cases the landlord’s obligation to notify the guarantor of his potential liability has been held to be a condition precedent, breach of which entitled the guarantor to be relieved of its obligations.

It is therefore still important for landlords to review and comply with landlord’s obligations in licences to assign, especially if:

  • They are framed as absolute obligations rather than “reasonable endeavours” obligations;
  • They could be seen as part of the mechanism that gives rise to the guarantor’s obligation to pay the rents;
  • The landlord could, by complying with its obligations, enable the guarantor to avoid or substantially reduce its liability by enforcing the tenant’s covenant.