Background

A landlord entered into a tenancy agreement with a tenant, who provided bank guarantees to secure future claims against the tenant. 

After insolvency proceedings were initiated against the tenant, the insolvency trustee exercised their statutory right to terminate the tenancy agreement approximately ten years before the end of its term. 

Three years later but before the expiration of the guarantee, the landlord called on the guarantee for damages caused by the premature termination of the tenancy agreement. The bank refused payment on the grounds that the claims were time-barred. 

Decision

The Supreme Court sided with the bank and held that:

• Damages caused by the termination of the tenancy agreement by the insolvency trustee (eg the loss of future rent payments) are incurred the moment that the tenancy agreement is cancelled “prematurely” by the insolvency trustee. 

• Even if damages cannot yet be quantified and the secured claim is thus not yet due, the guarantee may still be called, assuming that the maturity of the secured claim is expected to occur in the foreseeable future and the calling of the guarantee does not cause any damage to the debtor. 

• Claims arising from a guarantee covering damages in relation to a tenancy agreement are subject to a three-year limitation period, which begins once the guarantee may be called on. 

• Given that the landlord could have called the guarantee once the insolvency trustee terminated the tenancy agreement, their claims arising from the guarantee were already time-barred, even if the guarantee hadn’t expired.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.