Landlords often insist that a third party guarantees the performance of a tenant’s obligations under a lease. The general rule is that the guarantor is released if the landlord and the tenant vary the terms of the lease without the guarantor’s consent although parties may agree that any variations do not release the guarantor. In fact, it is usual for landlords to seek such agreement.
A recent English Court of Appeal decision serves as a reminder to landlords to exercise caution in varying leases without the guarantor’s consent. In that case, the lease did not provide that the guarantor would not be released in the event of a variation of the lease. The landlord and tenant subsequently entered into a licence for alterations, which amounted to a variation of the lease. The guarantor did not consent to nor was it a party to this licence. When the tenant became insolvent, the landlord sought to exercise the guarantee provisions under the lease. The English Court of Appeal upheld a High Court decision that the guarantor was released from its obligations under the lease as the licence amounted to a variation which had the clear potential to increase the tenant’s obligations.