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Conditions

Guarantor

Absolute covenant

Mount Eden v Towerstone
[2002] 31 EG 97; [2003] L&TR 4

A requirement for a prospective assignee to offer a guarantor of its covenants is often included in a lease as an absolute requirement in what is otherwise a fully qualified alienation covenant. There is no implied term that the landlord will act reasonably in requesting a guarantor. The most that can be said is that there is an implied term that any request for guarantors must be genuinely for the purpose of improving the landlords financial security

Uneasonable condition on granting consent

Landlord Protect Limited v St Anselm Development Company Limited
[2009] EWCA Civ 99

Summary

A head landlord acted unreasonably when it required (as a condition of consent to assignment) that a proposed assignee's guarantor should be released upon any future assignment of the headlease only where "reasonable alternative security" was provided by any future assignee. A landlord cannot normally seek additional protection as a condition for consenting to the transfer of a lease. The proposed assignee was not therefore entitled to the return of the deposit that it had paid upon exchange of contracts with the assignor to take an assignment of the headlease.

Facts

In July 2006, the defendant as proposed assignor (D) and the claimant as proposed assignee (C) entered into a contract for the sale of the head-leasehold interest in a block of flats. The premises were demised to D under the terms of a 99 year lease from 1964.

Clause 2 of the headlease provided that stated that the head landlord's consent was required to assignment "but such consent shall not be unreasonably withheld in the case of a respectable and responsible assignee or sub-tenant being offered".

The contract was conditional upon licence to assign being obtained and provided, amongst other things, that D use all reasonable endeavours to obtain such a licence. The contract also required C to provide references and “if properly required under the terms of the Lease ... provide guarantees, a rent deposit or other security”. The contract further reserved a right to either party to rescind the contract if the required licence had not been obtained within a specified time, and upon such rescission, the deposit would be returned to C.

C was a company that had never traded. It had no accounts and could provide no accountants’ or bank references. This led to the head landlord seeking a personal guarantee from C’s director. C’s director required the guarantee to be limited to three years, which was unacceptable to the head landlord.

Declaratory proceedings were issued and the court held that the head landlord had not been unreasonable in rejecting a limited guarantee.

Discussions continued with the head landlord as to the terms of an alternative form of guarantee, the head landlord agreeing to the release of the director as guarantor on any subsequent assignment:
    "provided that a reasonable alternative security is provided by the assignee pursuant to such subsequent assignment".
That was not acceptable to C which in due course gave notice rescinding the sale contract. D refused to accept that rescission and served notice to complete, treating C’s failure to complete as a repudiatory breach and forfeiting the deposit of £105,000.

Issue

The question before the court was whether the guarantee with provision for release on the terms sought by the head landlord was “properly required [by him] under the terms of the lease” (the words used in the sale contract); in another words, was it reasonable to require the guarantee in that form as a condition of granting the licence under the terms of the lease?

First instance

At first instance the court said that, the head landlord’s requirement that "a reasonable alternative security" should be provided by the assignee before the director would be released from liability on a subsequent assignment of the lease was a reasonable and proper one as it could be met simply by the strength of the proposed assignee’s covenant without looking to a third party guarantor and as such fell within the purview of the lease. Accordingly, C’s refusal to agree to the provision of a guarantee limited in such a way was a breach of the sale contract and D was therefore entitled to treat the contract as at an end and to retain the deposit.

Appeal

The Court of Appeal, however, unanimously held that as a tenant who takes an assignment of a lease is only liable for the period of time it remains the tenant, it would enhance the landlord’s rights and be unreasonable if a tenant or any guarantor had to agree to be liable for any period of time after it was no longer the tenant. The court considered that a landlord does not need any extra protection, such as that sought by the head landlord in this case, because it could always refuse consent if the proposed new tenant was not of sufficient substance to meet its liabilities under the lease. Such a new tenant would then have to give extra security by way of a guarantee or rent deposit or other form of security if it wanted to proceed. Stanley Burnton LJ at paras 23 and 25:
    "23. The head landlord's position was unreasonable because it would always be entitled to refuse to consent to a further assignment if the proposed assignee was not of sufficient substance, or was unable or unwilling to provide adequate security for the payment of rent and the performance of the lessee's covenants. The head landlord is thus entirely protected against an assignment to an insubstantial assignee. Its protection is the right to refuse consent, not the right to refuse to accept the discharge of the assignor's guarantor.

    25. As a matter of law, as I have already stated, it is in general unreasonable for a landlord to require a guarantee of the liabilities of an assignee to extend beyond the period during which the assignee is liable to the landlord by privity of estate. As a matter of fact, Mr Rodger's submission does not take into account reasonable possibilities that the parties should have in mind. The guarantor cannot and should not have to rely on the landlord acting sensibly and refusing to consent to an assignment to an insubstantial assignee. It is important to bear in mind that the landlord owes no duty to a lessee not to consent to an assignment to an insubstantial assignee. He is legally free to do so. The present head landlord, no matter how reasonable, may sell the reversion to someone whose reliability is less certain."
Accordingly, the head landlord could only have properly required a guarantee from C’s director whilst C remained the tenant and the terms it required for the release of the guarantee were not justified or reasonable. As a result, C had been entitled to withdraw from the purchase and was now entitled to the return of its deposit.


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