Guarantor Liability After a Contractual Tenancy Becomes Statutory
Guarantor Liability After a Contractual Tenancy Becomes Statutory — Mantzalos v. Michaelides, Civil Appeal No. 74/2013, Supreme Court of Cyprus, 14/02/2019.
The Facts
By its judgment dated 14 February 2019, the Supreme Court of Cyprus (Pamballis, Michaelidou, Liatsos, JJ.) addressed a question of considerable practical importance for landlords, tenants and guarantors alike: whether a guarantee given under a tenancy agreement continues to bind the guarantor after the contractual tenancy has been terminated and the tenant remains in occupation as a statutory tenant under the Rent Control Law.
The Appellant had signed as guarantor under a tenancy agreement dated 31.3.2008, the guarantee providing as follows: "I personally and jointly with the Tenant guarantee the observance of the terms of the present Tenancy Agreement and the regular payment of the rent until full settlement of all instalments and delivery of the Shop by the Tenant to the Owner." The contractual tenancy was terminated on 24.12.2009, whereupon the tenancy became a statutory one.
At first instance, the Rent Control Court of Nicosia held that the guarantor remained liable for the period of the statutory tenancy as well, and entered judgment against him for €57,000 in respect of rents due for the period February 2009 – July 2011, plus €1,900 per month as mesne profits from 1.8.2011 until delivery of possession, together with statutory interest.
The Legal Issues
The appeal squarely raised the question of the extent of the guarantor's liability. The Supreme Court began by restating the fundamental principles of the law of guarantee: a contract of guarantee is an agreement to perform the obligation of a third party should that party fail to do so, and any variation of the terms of the guaranteed agreement made without the guarantor's consent discharges the guarantor from liability for subsequent transactions.
As to the construction of a guarantee, the Court reiterated, citing Laiki Bank Ltd v. T.G. & Sons Importing Ltd (2004) 1 CLR 180, Georgiou v. Bank of Cyprus (2009) 1 CLR 862 and Argyri v. Chrysostomou (2006) 1 CLR 1362, that the scope of a guarantee is a matter of the parties' intention, as expressed in the language used, construed in light of the circumstances surrounding the giving of the guarantee at the time the document was drawn up (see also Heffield v. Meadows (1869) L.R. 4 C.P. 595).
The decisive issue, however, was the legal nature of the statutory tenancy. On the basis of long-established authority, Metochis v. Schizas (1952) 1 CLR 149 and Kyriakidou v. Mangadjian (1969) 1 CLR 1, a statutory tenancy is a different, new tenancy, founded on the law rather than on the contract from which it sprang. It follows that a guarantee of rent given in respect of the contractual tenancy does not extend to the subsequent statutory tenancy, unless it emerges from clear and unequivocal language that the guarantor expressly assumed liability for that period as well. The Court further underlined a consideration of particular weight: a statutory tenancy is of indefinite duration, and extending the guarantor's liability to it without clear contractual provision would impose a disproportionately onerous and open-ended burden upon him.
The position is different, as the Court clarified, where the tenancy agreement itself provides for a right of renewal: where the guarantor was aware of the tenant's unilateral right of renewal and the renewal in fact took place, the guarantee is treated as covering the renewal period as well (Michael v. Nishanian (1966) 1 C.L.R. 150; Argyri, above). A renewal, in other words, remains within the contractual framework which the guarantor accepted, whereas a statutory tenancy constitutes a fundamental change in the nature of the legal relationship.
The Court's Conclusion
Applying these principles, the Supreme Court held that the wording of the guarantee in question did not amount to a clear assumption of liability covering the statutory tenancy. The reference to securing the rent "until delivery of the Shop" was directly linked to the observance of the terms of the specific tenancy agreement, that is, the contractual tenancy, and not to any subsequent transformation of the tenancy into a statutory one. The appeal succeeded and the first-instance judgment was set aside to the extent that it awarded rents against the guarantor for the period after 24.12.2009, with costs of €3,000 in favour of the Appellant, both at first instance and on appeal.
The Significance of the Decision
The judgment crystallises with clarity the position that a rent guarantor's liability comes to an end, in principle, upon termination of the contractual tenancy and does not automatically extend to the period of the statutory tenancy. Its practical implications are substantial for both sides of a letting:
For landlords, the decision serves as a clear warning that a generally worded guarantee "until delivery of the premises" is not enough. If they wish the guarantee to cover the eventuality of a statutory tenancy, a very common occurrence for premises falling within the scope of the Rent Control Law, they must provide for it in express, clear and unambiguous terms at the drafting stage of the tenancy agreement.
For guarantors, the decision affords significant protection: they cannot find themselves exposed to an obligation of indefinite duration which they never expressly undertook. Any doubt as to the scope of the guarantee is, in substance, resolved in the guarantor's favour.
Finally, the case illustrates the importance of careful drafting of tenancy agreements and the guarantees accompanying them. The choice of the appropriate wording at the time of contracting may prove decisive for the parties' rights and obligations many years later.
The successful Appellant was represented in the proceedings by Mr. Anastasios Mylonas. This text is intended for general information purposes only and does not constitute legal advice. For any information regarding the judgment or for tailored guidance, please contact our firm.