commercial tenant guarantors and the potential pitfallls

Commercial tenant guarantors – avoiding the pitfalls

| Published on March 15, 2017

Commercial tenant guarantors – avoiding the pitfalls


A solid guarantee is crucial to many commercial letting deals. Landlords who might be reluctant to let to a little-known retailer or a start-up company may agree to the deal if the tenant offers a guarantee from a stronger company. Landlords must keep those guarantees in place and ensure they do not do anything which may invalidate them. The law holds traps for the unwary.

Katharine Jones, commercial property solicitor at Humphries Kirk in Dorchester highlights two areas where problems with commercial tenant guarantees can arise and explains how to avoid the pitfalls.

Variations and alterations

If your tenant’s compliance with the terms of a lease are guaranteed by a guarantor, care must be taken not to vary the lease without the guarantor’s agreement. The 19th century case of Holme v Brunskill makes it clear that if a lease is varied without the guarantor’s consent, they will be released from liability under the guarantee unless it is evident that the variation proposed will have no adverse effect on their interests.

Where the guarantor is willing to agree to a variation they should be asked to confirm this in writing, by adding their signature to a document the landlord and tenant will sign recording the variation, known as a ‘deed of variation’.

This approach works with a variation that is agreed in advance and documented in writing but will not help with less formal or accidental variations. In the case of Topland v Smiths the landlord granted a licence allowing the tenant to alter and extend the premises it occupied even though the lease prohibited alterations. The landlord intended this to be a one-off permission, but the tenant’s guarantor argued that the licence had varied the lease in a way that might increase the guarantor’s liability and, as it had not consented to the licence, the guarantor had been released from the guarantee. The court agreed, leaving the landlord without the safety net of the guarantee to secure the tenant’s performance of its obligations under the lease.

Assignments

If your tenant comes to you and asks for your consent to them assigning the lease to someone else, you must check whether there is anything in the lease which requires them, and their guarantor, to guarantee that the new tenant will comply with the terms of the lease. The need to check the lease for this sort of provision arises because where you have a lease that was entered on or after 1 January 1996, the law states that if a tenant lawfully assigns the lease to a new tenant, the tenant making the assignment will automatically be released from their obligations under the lease, as will their guarantor. Nearly all leases will contain such a provision.

This can cause problems where the original tenant is a subsidiary of a parent company which acts as the guarantor, and the parent company wants a provision included in the lease which allows the lease to be assigned to a different subsidiary company if this would better suit the parent company.

Example

Parent company owns subsidiary company A and subsidiary company B. Parent company is very wealthy, companies A and B are not. Landlord agrees to let to company A but only if parent company acts as guarantor. Parent company agrees but wants to cater for the possibility that it might be more tax efficient for another one of its subsidiaries to be the tenant. Landlord agrees to make provision for this in the lease but only if parent company agrees to act as guarantor for any new tenant.

A term in the lease which purports to make the original tenant’s guarantor (the parent company in the example) responsible for ensuring that the new tenant complies with the terms of the lease will not be enforceable and neither will a voluntary offer by the guarantor to do this, made at the time of the assignment. It is also not possible for the original tenant’s guarantor to agree to take the assignment themselves so that they become the new tenant.

These restrictions can cause difficulties for tenant companies who need the flexibility to reorganise themselves, often on a regular basis.

It is possible for landlords to get around the restrictions to some extent by including a provision in the lease that requires the original tenant to enter into what is known as an ‘authorised guarantee agreement’ in which they agree to guarantee the new tenant’s compliance with the terms of the lease. The lease may also provide that if the original tenant enters an authorised guarantee agreement, their guarantor will guarantee compliance with the terms of the authorised guarantee.

Conclusion

Commercial tenant guarantees are a complicated area and one which is constantly changing as a result of decisions being made by the courts. It is vital to take legal advice at an early stage if you are considering using one.

If you require advice on commercial tenant guarantees, or any other commercial property issue, please contact Katharine Jones in our commercial property team on 01305 251007 or email k.jones@hklaw.eu.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.