Chickens are coming home to roost for guarantors of leases.
The Court of Appeal has considered whether a guarantor of a lease can escape liability because of a failure by the landlord to give him early notice of rent arrears.
In 2003, Greene King underlet basement premises at 114/116 St. Mary’s Street, Cardiff for a term expiring in September 2032 at a rent of £95,000 per annum subject to review.
The premises were operated as a nightclub by Quisine Restaurants Limited (“QRL”) which was owned and controlled by Mr Shasha. When it was decided to assign the Underlease in 2007 to a Mr Stephen Dite, QRL entered into a covenant with Greene King to guarantee the obligations of Mr Dite under the Underlease and Mr Shasha entered into a sub-guarantee whereby he guaranteed the obligations of QRL to Greene King.
It was a further term of the assignment that Greene King would use all reasonable endeavours to give written notice to Mr Shasha each and every time the rent reserved by the Underlease were more than two months in arrears.
From the very start of taking over the premises in 2007, Mr Dite was in arrears and they swiftly mounted up so that, by December 2008, the total outstanding was in excess of £115,000. It was only at that point that Greene King started serving statutory notices pursuant to Section 17 of the Landlord and Tenant (Covenants) Act 1995 on QRL and Mr Shasha to recover arrears of rent.
Contrary to the agreement with Mr Shasha, Greene King did not serve any Notice upon him when any rental payment was 2 months in arrear and, in fact, no such Notices had been served by the time that proceedings were commenced against QRL and Mr Shasha claiming arrears in excess of £360,000.
Both QRL and Mr Shasha argued that the failure to serve any Notice whenever any quarterly rent payment was 2 months in arrear discharged them from any liability whatsoever. Their case was that the requirement to serve such Notice was a condition precedent to them having any liability and/or a fundamental term of the contract which entitled them to be free from any liability if it was breached.
At trial, the Judge held that the failure to serve any Notice did not go to the root of the contract and that it had not caused either of the guarantors any loss. The Judge did not think that, if the guarantors had been given earlier warning, it would have made any difference as they did not want any further involvement in the premises and they would have left the situation as it was with Mr Dite occasionally making some payments to the landlord.
The essential point for the Court of Appeal was whether the obligation upon Greene King to give the arrears Notice was fundamental to the bargain made between the parties and that there was an intention that any breach would entitle both guarantors to be discharged from any further liability?
The Court of Appeal accepted that the purpose of the Notice was to give Mr Shasha an opportunity to put pressure upon Mr Dite to meet the arrears but it noted that Mr Shasha had no actual control over Mr Dite and there was nothing that it could have done to prevent further liability arising under the Underlease.
In all the circumstances, the Court thought that it would be totally disproportionate if any failure to give the Notice released the guarantors completely. It noted that there was no absolute obligation to give such notice but only a qualified obligation to use reasonable endeavours and it regarded this as another sign that the obligation was not fundamental to the agreement reached. Furthermore, because the obligation was only owed to Mr Shasha, and was contained in a professionally drawn document, the Court concluded that there was no intention to release any party as it would have made no sense to release Mr Shasha alone when QRL had primary liability to Greene King.
Accordingly, the Court held that the giving of the Notice was not a pre-condition to any liability and the breach by Greene King did not entitle either guarantor to be discharged from any liability for the sums claimed.