In this case, the Court of Appeal examined whether or not the grant of a licence for alterations released a surety from its obligations on the grounds that the grant amounted to a variation in the lease to which the surety had not consented or been advised of.

The Rule in Holme v Brunskill (1878) LR 3 QBD 495

The case of Holme v Brunskill holds that where there is any agreement between principles which is guaranteed by a surety, the surety ought to be consulted as to any alterations to the guarantee agreement. If there is an alteration to the underlying agreement to which the surety has not consented and it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court will hold that the surety himself will decide whether to consent to remaining liable despite the alteration or to discharge themselves from any liability under the guarantee.

Facts

In 1981 a lease of the property known as the “Do It All Site” in Morecambe (the “Property”) was entered into by the lessor, PAT (Pensions) Limited (“PPL”), and the lessee WH Smith Do-It-All Ltd (now trading as Payless DIY Limited) (the “Tenant”). The Defendant, as parent company of the Tenant, was surety under the lease, guaranteeing the Tenant’s obligations.

In 1987, PPL granted the Tenant a Licence for Alterations (the “Licence”) allowing the construction of an opening of the west wall of the warehouse, construction of a new garden centre on the west side of the said warehouse, alterations to the layout of the existing car parking area and the erection of a high security boundary fence. The Defendant was not party to the Licence.

In 2001 the Claimant purchased the freehold reversion and became the landlord. In May 2011, the Tenant went into Administration. Rent under the lease was paid up until June 2011, after which date the lease was disclaimed by the Tenant’s administrators. The Tenant was subsequently dissolved in August 2012. In October 2012 the Claimant gave notice to the Defendant requiring it to take a new lease for the remainder of the term.

The lease contained an absolute covenant, with a limited set of exceptions, against alterations which “interfered with the construction, arrangement, external appearance of the demised premises or cut, maim, injure or remove any of the walls”.

The Defendant argued that the works granted by the Licence were clearly prohibited under the lease and that the grant of the Licence had released it from any liability under the lease as the Licence amounted to an amendment to the lease which it had not consented or been party to. Further, the Defendant’s guarantee under the lease was expressed to be subject to a proviso that the Defendant would not be released from its obligations under the surety “notwithstanding any neglect or forbearance on the part of the Lessor to obtain payment of the rent […] or to enforce observance or performance of any of the covenants or conditions on the Lessee’s part to be observed and performed or any time which may be given by the Lessor to the Lessee”.

The Defendant relied upon the rule established in Holmes v Brunskill, that the grant of the Licence made the Defendant’s obligations under the lease more onerous and was therefore a variation to the lease which was substantial enough to prejudice the Defendant’s position. The Claimant contended that the alterations were not substantial so as to prejudice the Defendant and further that the grant of the Licence was in fact an act of forbearance on the part of the Claimant.

The High Court held that the Defendant’s obligations under the guarantee became substantially more onerous as a result of the grant of the Licence and that as the Defendant had not provided consent to the Licence, it was released from its liability under the rule established in Holmes v Brunskill. Further, in relation to the Claimant’s argument that the grant of the Licence was an act of forbearance, the Court held that it was necessary for the Licence to have been granted when the Tenant was already in breach of covenant and that a binding agreement not to enforce covenants could not be sensibly considered an act of forbearance.

The Claimant appealed the High Court’s decision and the same arguments were put before the Court. The Claimant stated that (i) the scenario above does not fall within the Holmes v Brunskill rule as the Licence did not increase the Defendant’s obligations; and (ii) the grant of the Licence amounts to an act of forbearance and/or time given by the Claimant.

Increase in Obligations of Guarantor

In relation to the increase of obligations, the Claimant’s submissions focused on the definition of “demised premises” under the lease. The Claimant argued that the demised premises had, from the outset, been deemed to include any alterations to the Property. Therefore, the Defendant would have been on notice that their obligations were also subject to any future alterations to the Property and could become more onerous if the demised premises were to increase through additions or alteration. Despite the prohibition on alterations contained in the lease, the Claimant considered that the Defendant would have been aware that PPL or the Claimant was entitled to consent to alterations.

The Defendant agreed that its obligations could become more onerous in relation to a limited set of circumstances; however obligations arising from alterations to the Property could not be increased without the Defendant’s consent. In light of the prohibition in the lease, the lease would need to be varied and in any event, any alteration to the terms of the lease would have required the Defendant’s consent.

The Court agreed with the Defendant, holding that the Licence had, at the very least, the potential to increase the obligations upon the Tenant and therefore falls within the rule of Holmes v Brunskill.

Grant of Licence as an Act of Forbearance or Giving of Time

The Claimant submitted the same arguments in relation to the grant of Licence being an act of forbearance, however the Court upheld the decision of the High Court that forbearance would require a decision of the Claimant as landlord to not immediately take steps to enforce a covenant against a tenant in breach, but rather tolerate the breach for the time being. The Court held that there was no such forbearance on the part of PPL as the Tenant was not in breach of any covenant, but rather the Licence was an active authorisation of alteration works.

The Claimant submitted that in the alternative, the Licence amounted to the giving of time as it postponed the date of enforcement of the alterations covenant.  However, as with an act of forbearance, an essential ingredient is that the Tenant is already in breach of the relevant covenant. In the present case, the Licence was not postponing the date at which the Claimant would require the Tenant to remove the alterations; rather it was an authorisation for the works to be carried out.

Conclusion

This case highlights how essential it is to obtain the consent of any guarantor or surety to any alterations to an underlying guaranteed agreement if you wish to preserve the guarantor’s liability under a guarantee. Failure to obtain the guarantor’s consent could result in their obligations under the guarantee falling away, whilst the unlucky creditor has no route of recovery.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.