Lease guarantors: Obligations on lease guarantors and recovery of liquidated damages from a guarantor

Where a statutory demand is made against a lease guarantor as a result of a tenant’s failure to pay sums due, is the amount demanded a liquidated sum that requires the guarantor to pay instead?

The background

In Davies v Revelan [2019], a lease had been granted to a limited company, guaranteed by the company’s shareholder. The company entered insolvency, and a statutory demand was served by the landlord for unpaid sums including rent, service charge and insurance rent, plus an amount of interest.

The guarantor covenanted under the lease that the tenant would pay the rent and sums due under the lease and will observe the tenant’s covenants. In the event of tenant default, the guarantor covenanted to make good to the landlord on demand all loss, damage, costs and expenses arising or incurred by the landlord.

Referencing the Insolvency (England and Wales) Rules 2016, SI 2016/1024 and in the context of making a bankruptcy petition against the guarantor, the court was asked to consider whether the sums demanded constituted a liquidated sum which would therefore be payable immediately by the guarantor. The guarantor argued that the sum was unliquidated, compensating the landlord for loss. The landlord however argued that the sums were calculated according to the terms of the lease and therefore the demand was in respect of a liquidated amount – that is, a sum which is determined or fixed, payable as a result of the tenant’s breach.

The decision

On appeal, the court found that the sums were unliquidated and that the statutory demand should be set aside. The guarantor’s obligation was not limited to payment of the tenant’s unpaid sums, and the covenant contained in the lease was an indemnity rather than a requirement to pay a fixed sum. There was uncertainty as to the guarantor’s obligation to ‘make good’ loss, damage, costs and expenses and the statutory demand did not encompass these unliquidated costs.

Because the guarantor’s obligations did not end with payment of unpaid sums, and as the covenant was drafted to act as an indemnity and not to require payment of specific amounts, the relevant claim in this case was for unliquidated damages.

Advice and action for landlords

Landlords should be aware following this decision that, even where a guarantor is party to a lease, service of a statutory demand in the event of failure of a tenant to make payments may be unsuccessful. Guarantors’ obligations can often be far-reaching, and claims cannot be clearly liquidated, resulting in a claim for an unliquidated sum.

Drafting of a guarantor covenant may be tightened up to allow for a claim for liquidated damages payable immediately, together with an unliquidated claim for other losses, interest and so on. Landlords are advised to discuss with their solicitor the most appropriate drafting for this provision when granting a new lease, in particular of commercial premises.