Good news for Guarantors of High Rents in business premises

Good news for Guarantors of High Rents in business premises

Many guarantors of commercial leases which were agreed in boom times are exposed to significant risk and liability where the tenant can no longer meet its rent obligations. The Government has introduced legislation which effectively bans upward only rent review clauses in business leases entered into after 28 February 2010 – however that does nothing to assist guarantors of leases which were entered into before that date.

Section 132 of the Land and Conveyancing Law Reform Act 2009 provides that any rent review clause in a lease or agreement for lease entered into after 28 February 2010 (and relating to business premises) shall be construed as providing that the rent following the review may be fixed at a higher, lower or the same rent as that which applied at the review date, regardless of any attempt to make the review clause an “upwards only” review clause.

The recent unreported High Court decision of Judge Charlton in Reox Holdings plc –v- David Cullen and Simon Davidson is of interest in that context. It dealt with a situation where the tenant under a lease which was entered into prior to 28 February 2010 went into liquidation. The lease was disclaimed by the liquidator. The landlord elected under the terms of the original lease to call on the guarantor to take a new lease. The Court held that an agreement for lease was not created until the landlord exercised his contractual option to call on the guarantor to take a new lease. The Court held that given that this occurred after 28th February 2010, Section 132 of the 2009 Act applied to the new lease with the guarantor with the effect that the rent could be reviewed upwards or downwards.

Whether or not this ruling would apply to another lease depends to a large extent on the drafting of the guarantee provisions in the original lease.

Please contact John Fitzgerald or your usual contact in the event that you want to explore this issue in greater detail.