Varying commercial leases, the risks

Landlords should proceed with caution when varying commercial leases in agreement with tenants under licence. Such alterations may release a surety of a lease from their obligation, leaving the landlord exposed to risk of losses.

This issue has been brought to the fore by the recent case of Topland Portfolio No1 Ltd v Smiths News Trading Ltd (SNT). Topland Portfolio, the claimant in the case, was the landlord of a commercial property which was subject to a lease entered into by the previous freehold owner. The lease provided for repairs, restrictions and rent, and restricted the lessee from altering or adding to the premises. The lease also provided for a surety, an obligation taken on by Smith News, the defendant in the case.

Prior to Topland Portfolio acquiring the property the previous owner and the lessee entered into a licence giving the lessee permission to alter and extend the property. It is worth highlighting at this point that the licence contained a clause stipulating that all of the covenants, obligations and conditions contained within the lease applied to the works and the property in its newly altered state. Alterations to the property permitted by the licence included development of a new garden centre, changes to the car park and erection of a security fence. Smiths News was not a party to the licence.

14 years after entering the licence – with Topland Portfolio now landlord of the property – the lessee went into administration. At this point Topland Portfolio gave notice to Smiths News, as surety, claiming it was responsible for all sums owing under the lease, including rent. Smiths News argued it was released from its obligation as surety due to the significant enlargement of its obligation as a result of the variation of the lease, stemming from the licence. Topland Portfolio issued proceedings in an attempt to enforce the defendant’s obligations, arguing the licence did not vary the lease but had been a concession, notwithstanding the lease.

Previous case law provides that a surety is discharged from its obligations under a contract where the principal parties to the contract have varied what is being guaranteed, unless the variations are insubstantial or do not affect the surety. Following this precedence Topland Portfolio’s claim was dismissed on the grounds the works carried out could not be considered the same as what was permitted in the original lease and therefore these works could only be carried out by the lease being varied, albeit under licence.

Comment:

There are two lessons commercial property landlords can learn from this case. Firstly, they should tread very carefully when contemplating agreeing to any variations to a lease agreement with a tenant, whether under licence or not. It is important they consider the full implications of those variations and the risks that these may expose them to, either directly, as in the case above, or indirectly, such as potential implications for the freehold value of the property.

Secondly, when looking to acquire a commercial property landlords should have their solicitor undertake proper assessment of any existing lease agreements in place, ensuring any variations are insubstantial, do not affect any sureties or the surety has been party to the variations. It is also recommended that in cases where there is an existing tenancy that proper due diligence is not only undertaken in relation to the seller but also the current tenant.