Rent Control Tribunal: Significant Judgment on a Guarantor's Liability under Statutory Tenancy and the "Substitution" of a Tenant

Rent Control Tribunal: Significant Judgment on a Guarantor's Liability under Statutory Tenancy and the "Substitution" of a Tenant

B&P Michael Estates Ltd v. K.K. Extreme Entertainment Ltd and Another, Applications No. E12/2023 and K4/2024, Rent Control Tribunal of Larnaca – Famagusta (Famagusta Division), judgment dated 03/08/2026.

Our firm successfully represented the landlords in two consolidated Applications for rent arrears concerning a shop in Ayia Napa, which resulted in judgments totalling €387,504 plus interest against both the tenant company and the personal guarantor, jointly and severally, together with the dismissal of counterclaims exceeding €1 million.

The judgment is of particular legal interest for four (4) reasons.

1. "Tacit" substitution of a tenant does not amount to novation

The tenants argued that, as of 2011, they had been replaced in the tenancy by a third company to which the business had been transferred as a going concern, and that the landlords had accepted the change "indirectly and tacitly" through the receipt of rents and contributions paid by the new company.

The Tribunal, applying the principles set out in Bank of Cyprus and Others v. Koudounaris Food Products Ltd (1995) 1 C.L.R. 641, reiterated that a valid novation requires cumulatively: (a) the discharge of the original debtor from its obligations, (b) the assumption of those obligations by the third party, and (c) the intention to substitute (animus novandi). "Indirect recognition" falls far short of these requirements.

The tenants' own procedural conduct proved decisive: for years after the alleged substitution, they continued to pursue, in their own name, an application for the determination of a fair rent and to appear as respondents on appeal, without ever invoking the loss of their status as statutory tenants. The transfer of the business to a third company, for tax or banking reasons, was held to be an internal matter of the tenant which does not affect its obligations towards the landlord.

2. The wording of the guarantee determines its extension to the statutory tenancy

The most noteworthy aspect of the judgment concerns the guarantor's liability. Under settled case law (Mantzalos v. Michaelides, Civil Appeal No. 74/2013, judgment dated 14/02/2019), a guarantee given in respect of a contractual tenancy does not cover the subsequent statutory tenancy, unless such an obligation emerges clearly from the wording of the guarantee itself, particularly since a statutory tenancy is of indefinite duration and constitutes an additional burden on any guarantor.

In the present case, the guarantee clause expressly provided that "any extension of the tenants' possession of the demised premises by virtue of the Rent Control or any other Law" would not release the guarantor. The Tribunal held, distinguishing Mantzalos, that this wording reveals a clear intention to cover the entire period of the tenancy, both contractual and statutory, until actual delivery of possession, that is, for nearly fifteen years after the expiry of the written agreement.

The lesson for transactional practice is clear in both directions: for landlords, careful drafting of the guarantee clause, with express reference to the extension of possession under the Rent Control Law, secures coverage of the statutory period as well; for guarantors, signing such a clause entails liability of potentially unlimited duration.

3. The parol evidence rule is applied strictly

The guarantor's attempt to limit his liability through oral evidence as to the circumstances of signature (that he did not read the contract, and that the extent of the guarantee was never pointed out to him) was rejected in its entirety. The Tribunal recalled (Pigos Estates Ltd v. Kalogirou (2015) 1 C.L.R. 1953) that the provisions of a written contract do not admit extrinsic evidence to vary or contradict them, save where ambiguity exists, a condition not met here. Likewise, the challenge to an earlier consent judgment between the same parties foundered on the presumption of regularity and on the principle that statements made by counsel bind the litigants they represent.

4. Default and interest: the starting point differs by period

The Tribunal's analysis of when interest begins to run is also of interest. For the period during which an agreement between the parties suspended rent payments (to set off overpayments that had arisen from a judicial reduction of the rent, later reversed on appeal), no default (mora) arose: interest on that debt began to run only from the date of the appellate judgment which retrospectively restored the rent. By contrast, for the period after the anticipated exhaustion of the overpayments, each monthly rent became interest bearing from the day it fell due, in accordance with the contractual provision.

5. Counterclaims: strict proof of special damages and the limits of a tenant's cause of action

The tenants' counterclaims (for renovation expenses, the purchase of parking spaces, loss of goodwill, and other items) were dismissed in their entirety on two independent grounds:

First, as special damages, they had to be specifically pleaded and strictly proven (Panayi v. Kakopsitou (2001) 1(B) C.L.R. 839). Generalised assertions, unsupported by proof of payment, valuation reports or financial statements, do not suffice.

Second, and more fundamentally, by virtue of section 27(1) of the Rent Control Law (Law 23/83), a statutory tenant remains bound by the terms of the last tenancy agreement. Since the contract provided that licensing and alterations were the exclusive responsibility of the tenant, who was obliged upon termination to deliver up the premises "without any claim for compensation whatsoever", no cause of action arises for the recovery of such expenditure. It was noted, finally, that compensation for loss of goodwill is available only in the eviction cases falling under sections 11(1)(g) and (h) of the Law, not where the proceedings are founded on arrears of rent.

Conclusion

The judgment confirms that, in the field of rent control, the written contract remains the cornerstone of the landlord–tenant relationship, even decades after its expiry: its wording determines the extent of the guarantee, any rights over improvements, and the obligations upon delivery of possession. It further underlines that internal corporate restructurings on the tenant's side do not alter the identity of the contracting party vis-à-vis the landlord, absent the latter's express consent.

This note is provided for informational purposes only and does not constitute legal advice. For specialised guidance on rent control and tenancy disputes, please contact our firm.