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Archive for July, 2009

Guaranteed

Landlords commonly seek a guarantor for a tenant, be it from a major shareholder of a small company, the parent company for a subsidiary or from the out-going tenant on an assigment, in an attempt to protect themselves particularly against the tenant’s insolvency.

Liquidators and trustees in bankruptcy are enabled to disclaim onerous contracts.  It was once thought that a disclaimer of the tenant’s interest in a lease, which brings it to an end so far as the insolvent tenant is concerned, would also automatically release the tenant’s guarantor’s liability.  However, the House of Lords confirmed that a disclaimer only terminates the interest between the landlord and the insolvent tenant - it affects no other party including a guarantor (Hindcastle Ltd v Barbara Attenborough Associated Ltd [1996]).

This decision does not, of course, prevent the guarantor from attempting other arguments (not always successful) in an attempt to find a way out of its liabilities when called upon to meet them by the landlord.  In Unicomp Inc v Durodis Electron plc [2004], the landlord had the option of forfeiting the lease when the tenant’s related company went in to occupation in breach of the lease but failed to act thereby (claimed the guarantor) materially altering the guarantor’s liability (an argument which had been successful in the 1878 case of Holme v Brunskill).  However, the guarantee was stated to be unaffected by “any neglect or forbearance of the Landlord” and the argument failed.  The guarantor’s argument failed too in Doleman v Shaw [2009].  The guarantee lasted for “the period during which the Assignee is bound by the tenant covenants”.  Upon a disclaimer of the assignee tenant’s interest the guarantor claimed release despite the Hindcastle case - the Court of Appeal did not agree.  However, the guarantor was successful in arguing that the wording of a subsequent deed (to which the guarantor was not a party) varied the contract and thereby released the guarantor under the original guarantee in The Prudential Assurane Co Ltd v Ayres and another [2008].

If you wish to hear more, contact Hatherleigh Training - Vivien King would be pleased to help you.