Guarantees in Commercial Leases – Points to remember

The Wilkes Partnership’s Property Litigation Team often has to advise in respect of the enforcement of guarantees of commercial leases. Carl Csukas, a Partner in the Team, considers some of the relevant issues.

Recently the celebrity chef Gordon Ramsay lost a Court case in respect of a personal guarantee that he had given in respect of a lease of restaurant premises. The central issue was that the legal document containing the guarantee had not been signed personally by Gordon Ramsay. Rather, his father in law, who managed Gordon Ramsay’s business affairs before their fall out, used an electronic signing machine to imprint an electronic copy of Gordon Ramsay’s signature on to the document. Gordon Ramsay tried to argue that it was not his signature and he should not be liable under the guarantee. He lost.

In terms of guarantees of leases that was a novel issue for the Court to grapple with. It does not merit any further analysis here, other than that it is a reminder of the significant value to a landlord of an enforceable guarantee where a tenant has defaulted. It does, however, suggest that this is an appropriate moment to consider some of the more everyday legal issues surrounding the enforceability of guarantees in the realm of landlord and tenant law.

Across the recession, a commercial landlord’s ability to rely on a guarantee has proved crucial where many tenant businesses have failed. Whilst the economy might be recovering, the importance of guarantees is no less diminished as there will always be business failures.

Here are some key points to think about:

1. What is the guarantor guaranteeing?

Primarily the guarantor is guaranteeing the tenant’s obligations as they are at the date that the lease is entered into. Whilst this may seem like an obvious point, it is quite common for the nature and extent of the tenant’s obligations to be varied across the course of a lease. Most importantly, unless the guarantee expressly provides that it will operate to cover any variation, or the guarantee is similarly varied at the time the lease is varied so as to take account of it, the guarantee may be irrevocably broken.

Here are some examples of variations to the landlord and tenant relationship that may make a guarantee unenforceable:

• A commercial landlord or his managing agent should be wary of any ad-hoc arrangements such as agreements to vary the date or amount of rental payments that do not arise out of an express rent review clause in the lease or other existing provision in the lease.

• It is not uncommon for tenants to surrender parts of the area originally leased back to the landlord if requirements change, varying the extent of the property leased.

• Where the tenant has sublet part or carried out works of alteration without consent, and is therefore in breach of covenant, the landlord and his managing agent need to consider taking action in respect of the breach to force the tenant to purge the breach and restore the status quo. If the landlord is happy to acquiesce to the breach, he must first involve the guarantor as the acquiescence will crystallise in to a lease variation.

• Even where the lease provides a formal mechanism by which there can be a lease variation through the tenant making an application to the landlord and the landlord granting a consent or licence, such as to sublet part or to carry out works of alteration, serious consideration needs to be given as to whether the guarantor needs to be called on to approve the variation so that the guarantee continues.

2. Disclaimer

Where the tenant becomes formally insolvent, the liquidator, (if the tenant is a company), or the trustee in bankruptcy, (if the tenant is an individual), may exercise the right to disclaim the lease. Where there is a guarantor, the disclaimer might bring the insolvent tenant’s obligations under the lease to an end but that will not necessarily end the guarantor’s obligations going forward beyond the date of the disclaimer.

A properly drafted commercial lease will usually provide the landlord with a choice of remedies against the guarantor. These might include the right to claim a one off liquidated sum referable to the amount of rent usually paid following which the guarantor’s obligation ends, or to call on the guarantor to take a new lease of the premises for the residue of the term of the disclaimed lease. There will usually be time limits set within which the landlord must give notice if it wishes to call for a particular remedy.

If a landlord thinks that the tenant is about to become formally insolvent, or indeed if a notice of disclaimer is received from the liquidator or trustee in bankruptcy, it is essential that the guarantee provisions in the lease are consulted as quickly as possible so that a decision can be made as to the best course of action.

This is not just because time limits for taking any particular step may apply. There is a temptation if there is a disclaimer and the tenant vacates the premises for the landlord to go back into occupation. Indeed, leaving premises vacant may have ramifications for any buildings insurance policy. However, if the landlord does go back into occupation and starts to use the premises, then that act itself may break the guarantee.

Carl Csukas Says:

“What a commercial landlord can and should do in that situation will depend upon the wording of the lease and cannot be covered in detail in this article. If, however, the landlord is prepared and has taken appropriate advice, it is possible to manage what can be a fast moving situation whilst minimising loss and protecting the integrity of the property”.

If you require any specific advice on the issues raised in this article, please do hesitate to contact Carl Csukas or Victoria Khandker from the Property Litigation Team on 0121 233 4333.