Guarantees - How long do they last?
11th August 2020
11th August 2020
What does an article about guarantees have to do with some soggy looking sheep in a boggy field you ask? Read on and all will become clear.
You will have all experienced, at least once, that conversation with an enraged, or perhaps slightly righteous, guarantor who explains to you that he/she cannot be liable for the recent misdeeds of the tenant (usually a family member) because the guarantee that they signed at the commencement of the tenancy has expired because the initial fixed term of the tenancy has expired. Most landlords and agents will be of the, mostly correct, view that the guarantor is probably in for a shock as it is highly likely that they are not only incorrect, but also liable for the tenant’s misdeeds and the costs and damages that have resulted therefrom.
It is worth considering however that that is not always the case and thus there are some cautionary considerations to bare in mind.
The rules relating to this issue date back a few years, all the way back to 1877 to be precise, when the case of Holme -v- Brunskill came before the Queens Bench Division of the Court. The issue revolved around some (presumably soggy) sheep and a field unappealingly known as the ‘Bog Field’. Ultimately, the issue was about whether the guarantor remained bound by the guarantee agreement following an amendment to the original tenancy terms. The same argument and result was seen in the somewhat more recent 2014 case of Topland Portfolio No 1 Ltd v Smiths News Trading Ltd. In both cases the landlord had agreed with the respective tenant an amendment to the tenancy without consulting with the guarantor. In each case the Court took the view that where the agreement, subject to the guarantee, has changed to the detriment of the guarantor (i.e. making the guarantee more onerous than had previously been agreed) without the consent of the guarantor, then the court is unlikely to consider the actual extent of the detriment (which may be minor) in considering that the guarantee had been discharged and thus that the landlord is unable to recover from the guarantor.
How does this translate to modern residential tenancies then, which presumably will rarely involve soggy sheep and boggy fields?
The answer lies in the quality of the drafting of the guarantee agreement and what occurs when the initial fixed term of any tenancy comes to an end.
Firstly, section 5(2) Housing Act 1988 (HA88) provides that on the expiry of a fixed term AST, a periodic tenancy will arise and will be on the same terms and conditions as the original fixed term. Note here that this applies to rent as much as it does all other terms of the tenancy.
Therefore, where the fixed term expires and a new periodic tenancy arises on the same terms as the original, it is more likely than not that the guarantee agreement will also apply over the new periodic tenancy period, particularly so where the guarantee agreement states (as any decent guarantee should) that it applies to any extension or renewal of the tenancy. Ideally ‘extension’ should be defined to include a common law or statutory extension upon any expiry of a fixed term.
In the absence of these provisions, the active participation of the guarantor should be required to ensure the continuation of the guarantee into the new term.
Section 5(2) HA88 will not apply however where the fixed term has come to an end by surrender of the tenant or by court order or where the tenancy has been varied.
Accordingly, a guarantee will also end, and the guarantor will therefore be released from their liability where express or implied changes are made to the tenancy (the underlying contract) in the absence of the guarantor’s consent to those changes. This is so even where those changes are not substantial but are to some extent prejudicial to the guarantor.
Where the rent is increased, perhaps on the grant of a new fixed term, the extent of the guarantee is now more onerous than that previously agreed to because of the higher rental liability. Accordingly, the guarantor’s consent to the new agreement should be sought to be clear that the guarantee remains in place.
A guarantee deed or agreement are often seen as a straight forward contract and to an extent that is correct. It is fair to say that most sufficient guarantees can be extremely basic and are often limited to perhaps a single page of A4 paper. Any such agreement should be drafted in clear and unambiguous language, and most are.
There are guarantee agreements that seek to subvert the Holme v Brunskill position by including a clause that provides that the guarantee “shall extend to any variation”. However, in a 2013 case relating to the production of oil rigs, CIMC Raffles Offshore (Singapore) Ltd and another v Schahin Holding SA, the conclusion and warning was that such avoidance clauses need to be viewed carefully to be of any effect. The same conclusion was reached on a similar avoidance clause in the Topland Portfolio No 1 Ltd v Smiths News Trading Ltd case, where the judge pointed out that had the parties intended to avoid the position in Holme v Bruinskill, then clear words to that effect could have and should have been included within the guarantee.
The real question then is whether that guarantee agreement tucked securely in your file, that was signed at the commencement of a fixed term a year or perhaps five years ago but which has not been reviewed or renewed in the intervening period, despite new fixed terms or rental increases, is in fact worth anything to your landlord client? If there have been changes to the tenancy terms then it is quite possible that the landlord is no longer as protected as they think they are.
Be careful about being too relaxed about guarantees. Consider what has occurred during the term of the tenancy to which it applies and, before you serve notice on the tenant to increase the rent or renew the tenancy, consider carefully whether you need to also renew the guarantee agreement.
As the Court said back in 1877 in the Holme -v- Brunskill case, the landlord has an election to make when changing the tenancy terms. Unless the guarantor consents to the change and to be liable for that too, the landlord must choose whether to stick with either the benefit of having a guarantor sitting in the background ready to clean up the mistakes of the tenant, or to enjoy better terms or rental from the tenant without the protection of the guarantee.
If in doubt seek advice before amending the tenancy terms.
For any questions or further information relating to matters covered in this Legal Update, please contact Kevin Lever on 01485 897297 or at Kevin.Lever@kdllaw.com.
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