A tenant’s guarantee was rendered invalid because of undue influence.
Trustees of Beardsley Theobalds Retirement Benefit Scheme (“Trustees”) v J Yardley [30 September 2011] is a worrying decision for landlords. The Court, importantly, suggested that in certain circumstances landlords should check that guarantors have been made aware of the implications of the guarantee they are about to provide. Failure by landlords to do so could render the guarantee unenforceable.
Body Care International Limited (BCIL) had a lease of commercial premises guaranteed by Mr. Yardley, a director of BCIL, which ended in 2003. In 2001 BCIL had a substantial financial re-organisation, resulting in Yardley ceasing to be a director. He was, however, given the title of sales director, even though he was not a director.
The negotiations for a new lease of the premises to BCIL were very protracted, during the latter part of which BCIL had considerable cash flow difficulties. A BCIL director, Mr. Mooney, was determined not to become a guarantor himself for the lease, in part because he knew how risky it would be given BCIL’s financial situation. He decided to prevail on Yardley to be the sole guarantor, because he could not think of any way of finding any other guarantor.
Mooney misinformed BCIL’s solicitor that Yardley was a board director of BCIL, and this misrepresentation was passed on to the solicitors of the landlords, the Trustees. Mooney also devised a strategy for obtaining Yardley’s signature without his realising that he was signing a guarantee. He led Yardley, when asking him to sign the document, to believe that Yardley was witnessing Mooney’s signature. The page signed by Yardley did not make it clear that Yardley was signing up to be a guarantor.
Even after the lease was signed by Yardley, BCIL’s finances nearly prevented the lease from being completed and Yardley was not informed of this in the two month period between signing and completion of the lease. Yardley was unaware that he had signed as guarantor until he received a letter before action from the landlords in 2007, over two years after lease completion.
BCIL went into liquidation in 2007 and the landlords claimed rent and other money due under the lease from Yardley as guarantor. The sum claimed exceeded £100,000. Yardley defended the claim on the basis that he never signed the lease as a guarantor. Although he added his signature to the document, he thought he was signing merely as a witness.
The High Court agreed with Yardley and held that his guarantee was unenforceable, because Yardley had been unduly influenced to sign it, Mooney having misrepresented the nature of the transaction.
The landlords argued that, even if there was undue influence, they had no constructive knowledge of that and were, therefore, still entitled to enforce Yardley’s guarantee. The Court, however, stated that was untenable.
The landlords and their advisers knew about BCIL’s precarious financial position. They should, therefore, have checked that Yardley as guarantor was financially sound and aware of the risks he was undertaking. Yardley should have been asked to acknowledge in writing that he fully agreed to become a guarantor and had been made aware of the risks. He should also have provided a signed acknowledgment from a solicitor that he had been given appropriate advice before agreeing to sign, or a signed waiver of the need to take such advice.
Those precautions were particularly necessary given the landlord’s knowledge about the tenant’s financial position, doubts thrown up by the long history of negotiations over the lease and confusion over whether Yardley was a board director. The landlord’s advisers could readily have independently checked whether Yardley was a director.
This decision is a warning to landlords dealing particularly with individual guarantors for tenants, who appear to be in a financially precarious position. Landlords need a clear acknowledgment from the guarantor as to the risks he is taking on and a solicitor’s statement that he has been independently advised, or a waiver of the need for advice. Otherwise, the guarantee may be endangered by claims of undue influence.