Key points

  • Variations to a lease are usually obvious, so the landlord can easily remember that he needs to join in any current guarantors (including former tenants standing under an authorised guarantee agreement) in order to preserve the guarantee. However, granting a permission to the current tenant, which goes beyond the terms of the lease, can count as a variation. This may not be so obvious, but can have the same dramatic consequences - namely, the release of the guarantors.
  • A landlord should usually therefore include any current guarantors as a party to licence documentation. Alternatively, if it is "lawful" to do so in all of the circumstances, it might be better simply to refuse the tenant's request.

Background

It has been a common law rule since the Court of Appeal's 1878 decision in Holme v Brunskill that any amendment to a contract - where that amendment post-dates the creation of a guarantee supporting that contract - will discharge the guarantor's liability unless either:

  • the guarantor consents to the variation; or
  • the variation is clearly insubstantial; or
  • the variation quite obviously will not adversely affect the guarantor.

Most modern leases contain a clause which seeks to disapply this rule. For example: "The liability of the Guarantor will not be released or otherwise affected by any agreement between the Landlord and the Tenant, any licence or consent granted by the Landlord to the Tenant or any variation of a Guaranteed Obligation".

On the face of it, these clauses do work. However, depending on the facts, there is no guarantee (pun unavoidable) that a court will not find reason enough to reapply the Holme v Brunskill release rule. And such a clause will be strictly interpreted against the landlord, as the party who drafted the clause - the contra proferentem rule. Generally, if there is the slightest ambiguity as to whether a guarantor has been released or not, the courts have tended to rule in favour of the guarantor.

Therefore, if the underlying contract - that is to say, the lease - is to be varied in any way, it is best practice to seek the guarantor's consent to the variation. This will avoid any arguments at a later date as to whether (or not) the guarantor has been released, intentionally or accidentally. In practice, the guarantor should be joined in even if the variation - such as a licence to alter - doesn't initially seem to disadvantage the guarantor, or if the variation seems insubstantial. Again, this is to avoid arguments at a later date which - even if unsuccessful - will cost the landlord time and money.

Alterations made by the original tenant

If a landlord allows a tenant to carry out works that are greater than those envisaged by the alterations clause in the lease, this might have an impact on rent review: if the premises are rendered more attractive by the works, the achievable rent level will increase. Hence, the effect of the works on the rental level is usually disregarded for rent review purposes; but there is still potential for the increase at some point in the future.

An enhanced building means that the reinstatement obligation is also increased. Take, for example, a set of works which involve putting up some new walls, adding windows and new doors (all without actually extending or changing the overall demise). The tenant's ongoing obligations to keep the premises in good repair, properly decorated, to clean the windows and replace any broken glass etc: these obligations have all increased. In addition, so has the amount of work required to satisfy the tenant's reinstatement obligation at the end of the lease. And if the obligations on the tenant have increased, what can be required of a guarantor has increased as well.

It should be noted that a court, examining any particular scenario, will not wait and see if the tenant's obligations do, in fact, increase. Instead, it must be apparent - on the face of the variation - that the tenant's obligations are not ever going to increase, or will increase only "insubstantially" (whatever that might mean in any particular case).

If the lease terms - in force as at the date the guarantee is given - envisaged these types of work being carried out, or envisaged later variations to the lease terms, then a landlord has less to worry about. Any guarantor and/or former tenant who remains liable should still be asked to join in the licence to alter, to avoid any later argument about release. But if they refuse to join in, and the landlord is happy that the works do not constitute a variation to the lease - or they satisfy the Holme v Brunskill test if they do - then he may even need to consent to the works.

If the lease envisaged the alterations, the landlord could be accused of unreasonably withholding consent. And, quite apart from what the lease says about giving or withholding consent, if the works constitute "improvements" as defined in section 19(2) of the Landlord and Tenant Act 1927, statute will imply a proviso that the landlord will not unreasonably withhold consent.

If, however, a guarantor is refusing to join in the licence to alter, it will be a question of fact and degree as to whether the landlord is acting lawfully in using this as a reason to withhold or delay consent for the proposed works. This will come down to the test of reasonableness, as laid down by the Court of Appeal in the 1985 case of International Drilling Fluids. The test of reasonableness was considered, specifically in relation to alterations, by the Court of Appeal in the 2004 case of Iqbal v Thakrar. If the landlord is going to lose his security, one would expect this to weigh heavily with the court. The point does not, however, appear to have been the topic of litigation to date.

Variations made by an assignee

Insofar as a guarantor is standing directly for the assignee, in the latter's capacity as the current tenant, all of the above applies.

However, if the lease has been assigned, and the guarantor in question is a former tenant, or is the guarantor of a former tenant, then the situation is slightly different. The basic question remains: has the guarantor been absolutely released under the rule in Holme v Brunskill? If not, there is a second layer to the issue.

For variations made before 1 January 1996, the Court of Appeal's 1995 decision in Friends Provident Life Office v British Railways Board will apply if the variation was agreed between the landlord and an assignee of the lease. By this decision, former tenants and guarantors cannot be made liable for subsequent, unforeseen (i.e. not envisaged by the terms of the lease) variations made by an assignee.

The former tenant or guarantor might not be automatically released in full, however. They might still be liable up to the level of liability that they had originally agreed to, but just not for any enhanced level of liability attributable to the variation which the landlord agreed with the assignee.

For variations by an assignee on or after 1 January 1996, we must also consider section 18 of the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act). Former tenants and their guarantors will not be liable to the landlord for any "relevant variation". A relevant variation is, basically, a variation which the landlord has (or had) an absolute discretion to refuse. That is to say, it is lawful for the landlord - even if acting entirely unreasonably - to refuse the tenant's application for the variation. An example of this would be alterations of a type which the lease expressly prohibits (as is usually the case with structural alterations).

The effect of section 18 is broadly akin to the Friends Provident decision: the former tenant or its guarantor (if they remain liable at all) will not be liable to the extent that any amount of money due, or the level of performance of a covenant, is referable to a relevant variation.

Things to consider

This article was prompted by the High Court decision in Topland Portfolio No. 1 Ltd v Smiths News Trading Ltd earlier this month. In that case, it was held that a licence for alterations - permitting substantial works, namely the construction of an outdoor garden centre at a DIY store - constituted a variation of the lease, insofar as the nature and the extent of the works went beyond that envisaged by the alterations clause.

The surety was not a party to the licence and it did not otherwise give its consent to the agreement between the landlord and the current tenant. Accordingly, because the variation was substantial, the guarantee given many years earlier had fallen away. Upon the insolvency of the current tenant, the guarantor could not be pursued for rent arrears. The case provides no new law, but is a useful reminder of the potential danger of losing the benefit of guarantors' covenants if they are not included in any decisions and documentation affecting the tenant's liability under a lease.

If buying an investment property, the prospective landlord should check what consents have already been given (whether pursuant to the alterations clause or otherwise, such as alienation or use). Is there a danger that any existing guarantor (including a former tenant currently liable under an authorised guarantee agreement or, in the case of an "old" lease, under the law of privity of contract) could accidentally have been released completely or perhaps had their liability capped at the level they originally signed up for, because they were not party to a consent?

Even if it looks as if a guarantee may have fallen by the wayside, all may not be lost. The obligations entered into by the guarantor may have included an indemnity as well, which is likely to be continuing despite the failure of the guarantee. And, of course, while the tenant continues to comply with the obligations and covenants imposed on it by the lease, there is no need for recourse to the guarantor at all.