Synopsis: The recent Court of Appeal decision, Topland Portfolio No.1 Limited v Smiths News Trading Limited [2014] EWCA Civ 18, has provided a reminder to landlords, tenants and guarantors of the need to seek consent from all parties when contemplating a variation to an existing lease. Nicola Kirk, partner at Pitmans LLP, looks at the impact the decision may have on the hospitality sector.

Background

The landlord in this case, Topland Portfolio No.1 Limited (the “Landlord”), purchased the freehold to premises in the early 2000’s. The premises were occupied by a tenant, Payless DIY Limited (the “Tenant”). The Tenant’s parent company, Smiths News Trading Limited (the “Guarantor”) acted as Guarantor for its subsidiary, under the lease.

The lease specified that the Tenant was able to carry out alterations to the premises, as is the case with most commercial leases, subject to the usual requirement that the Landlord’s consent must be sought in advance of any alterations being made. In 1987, the Landlord’s predecessors entered into an agreement with the Tenant, granting consent to alterations to convert the premises into a garden centre and subsequently entered into a licence for alterations with the Tenant (the “Licence”). Unfortunately, neither the Landlord nor Tenant sought the consent of the Guarantor to these alterations, nor was the Guarantor made a party to the Licence.

The Tenant subsequently found itself in financial difficulty and by 2011 was in substantial arrears under the lease. This resulted in the Tenant going into administration in May 2011. A month later, the Tenant disclaimed the lease which left outstanding rent arrears of over £280,000 plus interest. As one would expect, the Landlord turned to the Guarantor under the lease to make good the arrears and served notice requiring the Guarantor to enter into a new lease for the remainder of the 35 year term which had started running in 1981 (5 years remained), and to pay the significant arrears.

The Guarantor’s Position

When the Guarantor received the demand to settle the arrears, it launched a defence based on the common law rule laid down in the late 19th century case of Holme v Brunskill (1878) LR 3 QBD 495), which remains good law, arguing that as the terms of Licence entered into between the Landlord and Tenant had increased the burden on the Tenant in respect of such activities as repairs, decoration, reinstatements costs etc., the liability of the Guarantor had therefore also increased. This increased liability on the part of the Guarantor had taken place without any reference to the Guarantor either at the time, or subsequently. As consent to this had not been sought from the Guarantor, the effect was that the Guarantor had been released from its obligations under the lease, which of course extended to any obligation to settle outstanding rent arrears.

Decision and Significance

The Court of Appeal was minded to uphold the first instance decision that the Guarantor had been released from its obligations under the lease as consent to the Licence had not been sought.

The case highlights the importance for all parties to a lease to ensure that they properly understand the structure of a lease agreement and the obligations that fall on landlords, tenants and guarantors. If acquiring a property subject to an existing lease, purchasers should check whether there are any guarantors and, if there are, whether the guarantors have correctly been joined as a party and consented to all and any licences and deeds which are supplemental to the lease. The case also highlights the relatively narrow circumstances in which a guarantor’s liability will be preserved following a variation of the underlying contract to which it has not consented.

This issue is likely to be one faced regularly by those operating in the hospitality sector. Leasing of premises is undoubtedly an activity undertaken by nearly all, if not all, hospitality companies and providers at some point in the lifetime of their business, either as landlord, tenant, sub-tenant, or guarantor. The implications of forgetting the guarantor are far too great to be ignored as were highlighted in the Topland case.