The unprecedented shutdown of many businesses due to Covid-19 has dramatically increased the number of payment arrangements that have been entered into between landlords and tenants.
Rent, and sometimes service charge and other sums, have been deferred or the frequency of payment changed from quarterly to monthly. These are all known as “giving time”.
Time will usually be given in the expectation that the tenant’s financial position will improve. Currently, this may be more cost effective for a landlord, compared to taking formal legal action to recover arrears. The viability of the tenant’s business is obviously a big consideration for the landlord.
If, however, the tenant has a guarantor, the landlord must be careful before giving time to the tenant.
A professionally drafted guarantee should contain a clause allowing the landlord to give time without prejudicing the guarantee. If it doesn’t, the landlord may have released the guarantor from the guarantee by agreeing to the payment arrangement.
If a landlord gives time without any right to do so under the guarantee, it could prejudice the guarantor. Giving time delays the landlord’s expected recovery from the tenant. If the tenant fails to pay and the landlord ultimately claims against the guarantor, the guarantor has a right to step into the landlord’s shoes to continue the pursuit of the tenant for the arrears.
If the landlord gives the tenant time, the guarantor obtains their right later than would have otherwise been the case. The tenant’s asset position will typically have decreased during the period of additional time given by the landlord. This in turn means the guarantor’s recovery in any insolvency will be less than it would have been, had the original payment terms been observed. This gives rise to prejudice (or even potential prejudice).
The established rule is that even exposing a guarantor to the possibility of this prejudice is enough to end the guarantee.
If the guarantee doesn’t allow for giving of time and the landlord still intends to grant the payment arrangement, it needs to obtain the guarantor’s agreement to the arrangement.
The important point to takeaway is that before any arrangement is entered, the landlord should check if there is a guarantee - and what it allows.
David Ford is a litigation solicitor at Brodies LLP.