Topland Portfolio No.1 Limited v Smiths News Trading Limited

 

The Message

Any material variation can discharge a guarantor!

The Case

A guarantor has successfully challenged its liability to meet substantial liabilities under a 1981 lease In 1981, a lease was granted of premises in Morecambe, Lancashire for a term of 35 years. The original tenant was WH Smith Do-It-All Limited and the guarantor was its holding company, WH Smith & Son Limited (now known as Smiths News Trading Limited).

Topland bought the freehold of the premises in 2001 and, when the tenant went into Administration in 2011, it sought to hold Smiths liable as guarantor for all sums outstanding and going forward.

The liability was substantial as the rent had increased to £310,000 plus VAT per annum and, if liable, Smiths would also have to meet all the other covenants under the lease, including all repairing and decorating and reinstatement obligations.

The lease provided that the guarantor would pay and make good to the landlord any default by the tenant and that such liability was to be unaffected by any neglect or forbearance on the part of the landlord to obtain payment of the rent or enforce the covenants against the tenant. The wording did not, however, extend to Smiths being liable for any variations made to the lease.

By a Licence for Alterations entered into in 1987, the restriction on not erecting any further building was relaxed by the landlord so the tenant could erect a new garden centre. The Licence was on the basis that the tenant would not have to pay any additional rent, as the new building would be disregarded for the purposes of rent review, but the tenant was obliged to keep the extension in good repair and to reinstate the premises to its former condition if the landlord reasonably required when the lease terminated.

Unusually, the guarantor was not a party to the Licence for Alterations. It did not therefore, formally consent to the variation of the Lease and the extension of the premises. Accordingly, Smiths argued that, in accordance with the law established back in 1878 in case called Holme v Brunskill, the effect of the variation was to discharge it from any further liability as guarantor.

The case of Holme v Brunskill decided that, unless a variation was clearly of no real consequence, then a guarantor of the tenant would be discharged by any variation unless it consented to it. This is the reason why guarantors are almost invariably parties to any licence or any change to a lease. Smiths argued that the repairing obligations under the lease had been clearly increased because of the enlargement of the premises.

Topland had to seek to argue that there was no material variation at all. Its case was that the Licence simply related to a concession or forbearance at that time in relation to the extent of alterations permissible and that there was always the flexibility to relax the prohibition on alterations without this being a variation. It referred to various provisions in the lease which anticipated that improvements and/or other works might well be undertaken. In particular, Topland noted that the premises were defined to include any new buildings which were constructed during the lease so this had always been foreseen.

Topland also claimed that there had to be something unfair about a variation before a guarantor could be released and that there was not only nothing unfair but Smiths, as the parent company of the tenant, was fully aware of the variation at all times.

However, the Court gave Topland’s arguments short shrift despite the ingenuity with which they were put forward. It held that the extension works had been originally prohibited by the lease and it had only been possible to build the new garden centre by varying the lease. The variation was clearly to the possible detriment of the guarantor as it increased the tenant’s repairing obligations under the lease and, accordingly, increased the guarantor’s obligations if the tenant defaulted.

As the variation did not amount to any neglect or forbearance, the proviso to the guarantee was not engaged and, as a result, there was nothing in the wording of the guarantee that kept Smiths on the hook. The Court held there was nothing unfair in a guarantor being released entirely where the law had been clear in this respect for many years and where it would have been possible to have drafted a guarantee clause which covered variations of this nature.

As a consequence, Smiths cannot be held liable for some £1.5million worth of rent or for any other liabilities under the lease.