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Leasehold guarantees – how not to let your surety off the hook

The recent case of Topland v Smiths [2014] EWCA Civ. 18 serves as a useful reminder of the rule in Holme v Brunskill (1878) LR 3 QBD 495. Landlords and their advisors should bear this case in mind when drafting leases and agreeing alterations. Failure to do so could allow the tenant’s guarantor off the hook.

Facts

In 1981 PAT, the landlord, let a commercial property to Payless, the tenant. Smiths were the tenant’s parent company and a guarantor under the lease. The Fifth Schedule to the lease set out Smiths’ covenants. In so far as is material it provided:

“The Lessee shall at all times pay the rent hereinbefore reserved… and that if the Lessee shall make default in the payment of the rent… the Surety will pay and make good to the Lessor on demand all loss damage costs and expenses thereby arising or incurred by the Lessor PROVIDED ALWAYS and it is agreed that notwithstanding any neglect or forbearance on the part of the Lessor to obtain payment of the rent herein reserved or any part thereof when the same shall become payable … shall not release or exonerate or in any way affect the liability of the Surety under this covenant”.

In 1987 the landlord granted the tenant a licence to alter the property. The permitted alterations included opening a wall, building a garden centre, altering a car park and erecting a boundary fence. Smiths were not a party to the licence. In 2001 Topland bought the reversion from PAT.

Payless went into administration and was subsequently dissolved. Topland brought a claim against Smiths, as surety, for unpaid rent in excess of £280,000. Smiths were prima facie liable under the lease but defended the claim relying on the rule in Holme v Brunskill.

The Rule

In Holme the claimant let a farm, together with a flock of sheep. The farm extended to 234 acres and there were 700 sheep. The surety guaranteed the tenant’s obligation to re-deliver the flock of sheep in good condition at the end of the lease. When the flock was re-delivered, however, the sheep were not in good condition. Earlier, in the course of the term, the tenant had made an agreement with the claimant that he would surrender a field of about 7 acres in exchange for a decrease in his rent of £10 a year. The surety had not consented to this variation. The Court of Appeal held the surety was released. The relevant rule was expressed in this way by Cotton LJ:

“if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration…if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration…but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable”

Common Ground in Topland v Smiths

It was common ground that the licence allowed work to be carried out which would increase the tenant’s obligation to repair under the lease. However, it was agreed there was no increase in the rental burden on the tenant. It was also agreed that if the alterations fell within the proviso to the Fifth Schedule to the lease, as set out above, then Smiths would not be released because they had expressly consented to remain bound in those circumstances.

The Arguments

First Topland argued the rule did not apply as the alteration did not increase the tenant’s obligations under the lease. The lease always envisaged that the tenant’s repairing obligations would be increased if a licence to alter were granted so the surety took this risk. Arnold J easily rejected this argument. The licence did have the clear potential to increase the tenant’s obligations. The lease did not envisage this would bind Smiths without their consent. Consequently the rule was potentially engaged unless the grating of the licence fell within the proviso.

In this regard Topland argued the circumstances fell within the proviso because the grant of the licence either amounted to “forbearance” or “time given” within the meaning of the clause. As to the first of these Arnold J accepted Smith’s arguments, there could only be forbearance where the tenant was in breach and the landlord refrained from enforcing its strict legal rights. The licence was not an example of this. Similarly the licence was not the grating of further time until the landlord could require the tenant to remove works. It was simply permission to carry out the works.

Consequently, the rule in Holme v Brunskill applied and Smiths were released entirely from their obligation under the lease.

Points to Note

Smiths were released from their obligation to pay rent arrears despite the fact the licence to alter did not increase the tenant’s obligation to pay the rent. The rule and the possibility of release is not limited to such narrow alterations.

Secondly, landlords and their advisors should bear in mind the following points when drafting leases or agreeing a licence to alter. Firstly, to avoid letting the surety off the hook landlords should consider excluding the rule in Holme v Brunskill altogether using express words. Secondly, in any event, they should ensure the surety consents expressly to any alteration to the lease and is a party to any licence to alter.

Christopher Kelleher

Christopher Kelleher is a barrister at 1 Essex Court practising in the commercial Chancery fields with a particular focus on property litigation. For more information visit www. 1ec.co.uk

No representation or warranty is given by the author or 1 Essex Court as to the accuracy of the information or opinions contained in this document and no liability is accepted for such information or opinions. This document does not and is not intended to amount to legal advice and is not intended to be relied upon.

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