Liability of guarantors- Greene King Plc v Quisine Restaurants Ltd

Today's post concerns the liability of guarantors under a commercial Lease. In tough times, a Tenant may wish to underlet all or part of their premises, in order to raise some much needed funds. However, the Tenant may be asked, by the Landlord, to guarantee the obligations of the under Tenant. This is especially the case if the under Tenant is a 'weak covenant' i.e. they are not a reputable Tenant. By giving a guarantee, the Landlord gets an assurance that his rent will be paid.

The facts of Greene King v Quisine Restaurants Ltd are this. Greene King (GK) underlet basement commercial premises to Quisine Restaurants Ltd (QRL). QRL was owned by a Mr. Shasha (Shasha). The underlet was assigned and QRL guaranteed the obligations of the assignee.  Shasha also entered into an agreement whereby he would he would guarantee the obligations of QRL to GK. GK would use its reasonable endeavours to inform Shasha every time the underlease was more than two months in arrears. The underlease rent later became more than two months in arrears and GK did not serve any notice on Shasha (informing him of the same). Both QRL and Shasha argued that the serving of notice, to inform them of rent arrears, was a condition precedent of them being liable to act as guarantors. As the notice was not served, QRL and Shasha argued they were released from their liabilities. The court disagreed and held that the serving of the notice did not go to the root of the contract and did not cause either of the guarantors any loss. The serving of the notice was to give Shasha the opportunity, to put pressure on the assignee, to meet the rent arrears. Shasha did not have any control over the assignee and could not have prevented any further liabilities. The court held that a failure to serve the notice did not release QRL and Shasha from their guarantor liabilities.

What does this mean for Landlords and Tenants? the case illustrates a classic principle of contract law that underpins property cases- the court will not intervene to perfect a bargain made between commercial parties. On a practical note- guarantors will not be released from their liabilities, regarding assignees, if the Landlord forgets to serve a notice. This sets a precedent in favour of the Landlord and will come as a relief at a time when most retail and high street Leases are due to expire and the incoming Tenants are relatively young compared with the exiting Tenants. It is a welcome present for Landlords who fear recovering their rent from struggling retail Tenants (especially as the Commercial Rent Arrears Recovery regime is not set to come into force until this summer). The above, along with break clauses, are another weapon in the Landlord's armoury.

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