Keeping guarantors in the loop: an update

13 February, 2014

The case of Topland Portfolio No.1 Limited v Smiths News Trading Limited (2014) is a reminder to landlords to ensure that guarantors consent to any variations to a lease or alterations to premises. The case concerned retail premises that were traded out of by the WH Smith group through its DIY subsidiary, Do-it-All. Do-it-All’s obligations were guaranteed by a parent company (Smiths) in the group. The premises were altered. A licence was granted by the landlord but Smiths was not a party to it. When Do-it-All went into administration and then liquidation, the landlord tried to enforce the guarantee to (1) collect the back rent and (2) require Smiths to take a lease of the premises. Smiths contended that the guarantee fell away at the point when the licence was granted. The High Court and the Court of Appeal agreed with Smiths.

Whether a guarantor is released requires consideration of the substance of the alteration and its effect on the guarantor in all respects. If the alteration to the lease is clearly unsubstantial or is clearly beneficial to the guarantor then he will not be released. In all other cases he will be. The burden of proof is on the lessor. In this case, while the rental obligation would not increase as a result of the alterations, the obligations as a whole under the lease would change. The landlord had not established that the change was unsubstantial or that Smiths would benefit from the alterations.

The landlord tried to contend that the alterations were a breach of lease and Smiths should not be released in such circumstances. While the alterations were licenced the landlord contended that this was nothing more than an agreement to hold off acting on the breach. This argument was dismissed. The Court of Appeal confirmed the effect of the licence was more than an agreement not to sue. It was positive permission to alter with the effect that the premises would be defined by the lease in its altered state.

The case is an important reminder that where landlords have leases subject to guarantees, consent of the guarantor should be obtained for all changes, not just changes to the form of the lease but also changes to the premises themselves. A copy of the decision can be viewed here: by Nitej Davda, Associate