Bethany Fitzgerald and Haris Qureshi of our Dispute Resolution team delve into the Limits of a Guarantor.

The question of whether a guarantor would still be liable after the end of the term of an Assured Shorthold Tenancy (‘AST’) will depend firstly upon the wording of the terms within the AST. If this is not clear, this liability may depend on the actions of the parties. This article will focus on how the conversion of a fixed term AST to a statutory periodic tenancy can affect guarantor liability.

The general rule is that a guarantor’s liability will not continue beyond the end of a fixed term AST unless it is clearly expressed in the guarantor clause to continue (Junction Estates v Cope [1974] 2 P&CR 482). The wording should be clear and unambiguous and so this would be a matter of contractual interpretation. If the wording does not exist, the guarantor’s liability will cease when the fixed term AST comes to an end, or if the tenant is otherwise released from its obligations.

The Court of Appeal confirmed in Superstrike Ltd v Rodrigues [2013] EWCA Civ 669 that a fixed term AST which “continues” is in fact a new tenancy that automatically begins the day after expiry of the AST on the same contractual terms. Under section 5 of the Housing Act 1988 (‘HA 1988’), this new tenancy is known as a statutory periodic tenancy.

Under section 5 of the HA 1988, a new statutory periodic tenancy may be seen as an extension of the fixed term AST where the tenant remains in occupation after expiry and therefore it could be argued that the guarantee should continue.

However, where there is no express consent by the guarantor that extends the guarantor’s liability beyond the end of the fixed term and into the statutory periodic tenancy, it is possible that a significant amendment to the contract will discharge the guarantor’s liability. As per the rule in Holme v Brunkskill [1877] 3QBD 495, the amendment will be considered significant unless it is patently insubstantial or incapable of adversely affecting the guarantor. An example of the application of this general principle is shown by the Court of Appeal in Lloyds TSB Bank Plc v Hayward [2005] EWCA Civ 466 whereby the Court of Appeal reaffirmed that a guarantor will be released from liability under a guarantee where, after the giving of the guarantee, the contractual position between creditor and debtor is varied to the disadvantage of the guarantor, without the guarantor’s consent.

To conclude, if the terms of the AST do not state that a guarantor’s liability will continue throughout the AST and/or following the creation of a new tenancy, the guarantor’s liability would fall away, including in relation to unpaid rent by the tenant. The consequence of this to a landlord would be that no demand for payment from the guarantor can be made if rent is not paid the day it falls due.  If a landlord were to issue a claim in the County Court for unpaid rent from the guarantor upon the tenant’s default, the guarantor will have merit to defend the claim.

This is therefore an important reminder for landlords to ensure that the terms of the AST makes clear that the guarantor’s liability would continue throughout the AST and/or following creation of a new tenancy, if intended.

If you need help with any issues relating to this article, please contact us to speak to a member of our Dispute Resolution Team.