Enforceability of lease guarantees

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Created: Tuesday, September 24 2013 10:41

Typically, a Personal Guarantee in respect of a commercial lease provides that, in the event of a default of the principal tenant, the guarantor is obliged to enter into a new lease on the same terms and conditions as were contained in the original lease.

Often, the original lease will pre-date the commencement of Section 132 of the Land and Conveyancing Law Reform Act 2009 and may contain an “upward only” rent review clause. Section 132, which provides that any rent review clause in a commercial lease must allow for the rent to be reduced, does not apply to commercial leases entered into before 28th February 2010 with “upward only” rent review clauses.

Therefore, if you gave a Personal Guarantee in respect of a lease entered into before 28th February 2010, the essential question is whether you are bound by the original lease with the “upward only” rent review clause, or whether you could avail of section 132 of the Act and not be bound by such a clause.

A recent High Court decision in Reox Holdings Plc v. Cullen and Davidson (unreported 26th July 2012) clarified the matter. In this case, the High Court stated that where a guarantor is obliged to step into the shoes of a defaulting tenant and take a new lease on the same terms as the original lease, the restriction on “upward only” rent reviews will apply to the new lease.

This is regardless of the fact that the Guarantee was entered into prior to 28th February 2010 and the original lease contained an “upward only” rent review.

In the Reox Holdings case, a lease was entered into in 2007 and contained a Guarantee which provided that, in certain specified situations and if so requested by the landlord, the guarantor would enter into a new lease on the same terms and conditions as were contained in the 2007 Lease. A default occurred by the principal tenant and the landlord called upon the guarantor to enter into a new lease. The 2007 Lease contained an “upward only” rent review clause and the landlord sought to have the guarantor liable for the existing lease with the “upward only” rent review.

However, the Court held that an upwards and downwards rent review applied to the new lease entered into by the guarantor with the landlord upon the default of the original tenant and the imposition of a new lease on the guarantor.

Therefore, if you are a guarantor and the landlord seeks to impose a new lease upon you, the provisions of section 132 of the Act apply and an “upward only” rent review clause cannot be imposed upon you.