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Guarantor pays nothing in DIY store case

The recent Court of Appeal case involving Topland Limited and Smiths News Trading Limited was a salutary lesson about the strict rules that protect guarantors and the perils of forgetting them.  The facts of the case were relatively simple:  Topland owned a commercial property, leased to the rather aptly named Payless DIY Ltd, which became insolvent.  Topland brought a claim against the tenant’s guarantor, Smiths, for arrears of over £280,000 and required them to take a new lease for the remainder of the term. Smiths argued that it had been released from liability as it had not consented to an earlier licence for alterations, granted to the tenant by Topland’s predecessor.

The case revolved around a principle of law (known as the rule in Holme v Brunskill) established in 1878 when a tenant farmer was obliged under the terms of his lease to re-deliver a flock of some 700 sheep in good condition.  Unfortunately, when the time came, there weren’t 700 sheep and they were not in good condition. The landlord looked to the farmer’s surety to make good his losses but during the course of the lease, and unbeknown to the surety, the farmer had agreed with the landlord that he would surrender a field in exchange for a decrease in rent.  Because the surety had not consented to this alteration to the lease, the court held that the surety was released from his obligations.  The principle that emerged has since become embedded in law: unless it is self-evident that a variation is insubstantial or incapable of prejudicing a guarantor then the guarantor will be released from its liabilities unless it consents to the variation.

Over 130 years later, the rule still holds firm. The licence granted by Topland’s predecessor amounted to a variation as it permitted structural works (the construction of a new garden centre to be accessed by making an opening in the wall of the building) which were prohibited by the lease. The increased obligations were not of the type contemplated by the lease (such as an increase in rent through rent review) and, as the alterations could only be carried out with the landlord’s agreement, the guarantor was entitled to expect that its consent would be sought as well as that of the landlord. The Court was of the opinion that the variation had clear potential to increase the obligations of the guarantor in the event of the tenant’s default. The rule in Holme v Brunskill applied and, as the surety had not consented to the variation, it was discharged.

Although patently not new law, this is a timely reminder that guarantors should be joined into documents that might be viewed as variations to leases. Not to do so is to run the risk of having to argue that the changes are self-evidently insubstantial or do not prejudice the guarantor. The ultimate result might be losing the benefit of a guarantee just when you need it the most.

Case reference: Topland Portfolio No. 1 Limited v Smiths News Trading Limited [2014] EWCA Civ18