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Tuesday 19th February 2019 Steven Porter 

The Value of a Lease Guarantee - a Cautionary Tale

Recently we acted for a landlord (“L) who let a commercial property to a tenant (“T”) which was a newly formed company.

The parent company of T (“G) provided a guarantee as to the performance of T as a tenant but subject to the proviso that G would be released from its guarantee if at 24th December 2018 T had paid its rent and all other monies due under the terms of the lease.

T duly paid the rent due on 29th September, meaning that the rent was paid up to 24th December and assuming that no other monies would fall due on 24th December G would be released from its guarantee as the obligation to pay the rent up to that date would have been fulfilled.

In October 2018, T went into liquidation and again in October 2018 the liquidator appointed disclaimed the lease. A Liquidator does have the power to disclaim a lease entered into by the company that it is administering which broadly means that the lease terminates.

Under the terms of the guarantee it expressly stated that in the event that the lease was disclaimed then L could call upon G to enter into a new lease for the same premises on the same terms and for a term equal to the residue of the disclaimed lease, which in this instance did not expire until 2035.

Although G had fulfilled the conditions required in order to be released from the guarantee (i.e. the rent had been paid up to 24th December) the release date was nevertheless 24th December 2018. In consequence until 24th December 2018 G continued to be liable under the terms of the guarantee. In consequence, L was able to call upon G to enter into a new lease pursuant to the guarantee because the lease had been disclaimed before the guarantee itself had expired.

Had T been placed into liquidation and the lease disclaimed after 24th December 2018 in these circumstances then G would have been released from its guarantee. Indeed, had T and G properly liaised with each other then the chances are that G would have been able to walk away from the situation without retaining any liability.

This case highlights the importance of ensuring that a client acting as a guarantor knows the risks and understands the consequences of actions that it takes as these can lead to unintended and unforeseen consequences.

In this particular case the landlord was able to come to a financial settlement with the guarantor which would not have otherwise been available had the guarantor ensured that the disclaimer was not submitted until after 24th December 2018.

For more information on any of the above please contact Steven Porter, by email: sporter@jpclaw.co.uk, or by telephone: 0207 644 7290 or contact him via LinkedIn.

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice.


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