09 July 2013 #Commercial Real Estate
In the recent case of Topland Portfolio No. 1 Ltd v Smiths News Trading Ltd  EWHC 1445 (Ch), the High Court held that a guarantor was automatically released from its obligations under the terms of a lease as a result of the landlord and tenant entering into a licence for alterations to undertake works to a property without its consent.
The facts of the case were that in 1981 a lease was entered into and the tenant’s obligations guaranteed by a surety. The lease contained an absolute prohibition on the tenant carrying out any alterations to the property. Years later the tenant went into administration. In accordance with the terms of the lease, the landlord served notice on the surety requiring it to take a new lease of the property for a term equal to the remainder of the original lease term.
The surety maintained that it was not liable to the landlord as it had been released from its obligations as guarantor by virtue of the lease being varied in the form of a licence for alterations. The landlord and tenant had entered into a licence for alterations in 1987 but had not made the surety party to, nor had they requested the surety’s consent to the licence.
The licence for alterations permitted the alteration and extension of the property which involved the carrying out of substantial work. The surety relied upon the case of Holme v Brunskill and argued that the licence had increased its obligations under the lease. The works were of a substantial nature and placed an extra burden on the tenant which, in turn, made the position of the surety more precarious. The surety argued that the variation was significant and could therefore prejudice its position.
Although the landlord raised some interesting arguments, the Court ruled in favour of the surety. It held that the works permitted by the licence essentially comprised the construction of a new garden centre and could only be carried out by varying the lease. It did not matter that the permission was granted in the form of a one-off licence; a variation was required unless there was to have been a clear breach of the alterations clause (prohibiting any alterations) contained in the lease.
The Court also stated that it was for the landlord to show that there had been no variation which was not insubstantial, or that such variation that existed was one which could not be prejudicial to the surety.
Whilst the case has not created new law, it does remind landlords that they must take extra care when entering into licences for alteration so that they do not inadvertently release a surety from its obligations under the terms of the lease. To ensure that a surety is not released it is prudent to make it party to any licences for alteration or to obtain its consent to a licence.
If you have any queries, please contact our Commercial Real Estate department.