54 property


When can the tenant guarantor of a commercial lease breath easy?


It is not uncommon for a smaller business or businesses with a short track record to find it difficult to take a lease of commercial premises without the business owner having to be a guarantor. Those obligations can follow you around and can pop out of the woodwork even after you thought you had passed the premises on to someone else, writes Frankie Tierney, head of dispute resolution, chief executive, Herrington & Carmichael


The fairness of the legal treatment as between a landlord and a tenant guarantor has always been something of a balancing act.


The Landlord and Tenant (Covenants) Act 1995 helped the guarantor; as if a landlord agrees to the assignment of the rest of the lease to a new tenant he can still require the outgoing tenant to enter into an AGA (Authorised Guarantee Agreement) which keeps the outgoing tenant on the hook if the incoming tenant fails to pay the rent. That AGA process cannot however be used against a guarantor.


It also introduced section 17 which requires the landlord to serve a specific notice of the intention to claim rent arrears from the former tenant or their guarantor within six months of the date the sum first became due. If the landlord misses the date, the sum cannot be recovered.


A guarantor can also be released from their obligations post an assignment of the lease to another tenant, if the landlord then agrees with the new tenant to significantly vary the terms of the lease and those variations relate to things the landlord had an absolute right to refuse. If the new tenant then defaults on the rent, goes bust or disappears, the landlord is not able to go back to the guarantor. This is because the lease the guarantor agreed to cover is now not the lease operating over the property.


One of the defences available to the previous guarantor is that the lease itself has been surrendered – in other words the landlord has accepted the property back.


Landlords rarely enter into formal deeds of surrender (unless it is part of the process of then entering into a brand new lease with the same tenant). Generally a surrender is “by operation of law” which effectively means looking at the actual conduct of the landlord – have they unequivocally accepted the property back and is that wholly inconsistent with the lease continuing.


But guarantors rely on this at their peril. It is quite difficult to satisfy a court that surrender by operation of law has taken place. This was re-stated earlier in the year by the case of Padwick Properties Ltd –v- Punj Lloyd Ltd (2016).


Here a company tenant had gone into administration www.businessmag.co.uk THE BUSINESS MAGAZINE – THAMES VALLEY – MAY 2016


and its administrators wrote to the landlord’s solicitors telling them the company had vacated and that the “security and safety of the property will revert to your clients”. A little later the keys were returned and the landlord boarded up the premises and marketed it for sale. The company then went into liquidation.


The landlord then demanded from the company’s guarantor payment of the unpaid rent and rent going forward for the remainder of the lease term. The guarantor insisted the actions of the landlord amounted to the lease having been ended along with his obligations to pay anything more.


Unfortunately for the guarantor the judge disagreed, ruling that all the landlord did was protect the security of the premises after the tenant disappeared. Given the cost of round the clock security guards was some £2,000 per week it was reasonable of the landlord to have boarded up the lower floor windows with steel shutters and installed alarms.


Neither were the acceptance of the keys and the marketing of the property fatal for the landlord. Indeed the landlord had expressly confirmed it was not accepting a surrender. It is useful to note however that had the landlord used the premises or re-let them that would have been sufficient to bring the lease to an end and let the guarantor off the hook.


If you are a guarantor and find yourself in the firing line of a landlord who has been let down by their tenant, it is important to get clear advice early on.


Details: drteam@herrington-carmichael.com 01276-686222 0118-9774045


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