22 June 2018

Directors beware – tips and traps with personal guarantees in leases

| BAL Lawyers
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Personal Lease Guarantee

It is common for landlords to require tenants to provide security under a lease in case of hiccups by someone else down the track – such as the non-payment of rent, keeping a troop of kangaroos in the spare room despite a no-pet clause or pouring concrete down the drains and damaging the pipes and septic system (this has happened). Such security is usually in the form of a bank guarantee or bond. When the tenant happens to be a company, usually this also requires a personal guarantee from the directors.

A guarantee is an agreement whereby the ‘guarantor’ will accept responsibility for a debt owed to another party, in this case, the landlord. A common guarantee clause in a lease may read “the guarantor will pay the owner on demand any rent and all other money at any time becoming owing to the owner hereunder…”

In real words, if you give a personal guarantee and the tenant does not pay the landlord, the landlord may come after you personally for everything, whether the breach is your fault or not.

Personal Guarantees – obligations and risk

A recent landlord v tenant case illustrates the financial risk that company directors take when giving personal guarantees under a retail lease.

The company directors in the case NE2 Pty Ltd v P.T. Ltd [2018] NSWCA 10 gave unlimited personal guarantees, exposing themselves to potentially ruinous losses.

In this case, handed down in the Court of Appeal on 14 February 2018, a tenant entered into a lease for a fresh fruit and vegetable shop in the Westfield Centre, Miranda. The directors of the tenant guaranteed the tenant’s obligations under the lease.

When the tenant defaulted on paying rent, the landlord terminated the lease and brought proceedings to recover damages from both the company and the directors.

The tenant disputed the termination and damages claimed by the landlord alleging that the landlord had promised that their shop would be the only fresh fruit vegetable retained in the precinct of the shopping centre. The tenant claimed that this representation was ‘false and misleading’ as Franklins opened up next door selling fresh fruit and vegetables.

On appeal, it was determined that the landlord did not make express or implied representations as claimed by the tenant. Further, it was held that the landlord had no duty to disclose that Franklins would soon become a tenant of the shopping centre and would also retain fresh fruit and vegetables.

The landlord was therefore entitled to retrieve arrears in rent up to the date of termination, lost rent from that date until 10 November 2015 (when a new tenant moved into the premises) and the cost of removing the tenant’s fixtures and fittings. These damages were approximately $3,900,000.

PT Ltd subsequently pursued the directors for the debt personally and commenced bankruptcy proceedings in an attempt to recover same when the tenant company could not and did not pay.

Personal Guarantees – are they enforceable?

In short yes. However, it is also important to note that issues with guarantee clauses can have ramifications for a landlord if not drafted correctly or if the landlord never ensured that the director had actually signed the lease. A director may also argue that despite signing the lease as a director of the tenant, they never signed the lease in their personal capacity and therefore the guarantee is not enforceable.

In the case Alonso v Srs Investments (Wa) Pty Ltd [2012] WASC 168, proceedings were brought against a director who gave a personal guarantee for unpaid rent under a lease. The lease was drafted so the director would sign twice on the execution page, first as a director of the tenant below the words ‘director’ and secondly in her personal capacity as the guarantee under the words ‘Sara Sandford’. However, the execution page was never signed under the words ‘Sara Sandford’.

When the landlord commenced court proceedings chasing the director for the unpaid rent, the director of the tenant company put on a defence that she had no intention to be legally bound by the lease in her capacity as a guarantor as she only signed as a director of the company.

Unfortunately for the director, in this instance, the court held that it should be inferred that the director signed the lease in her personal capacity as well as a director of the tenant. This largely came down to the fact that she was listed personally as a guarantor in the particulars of the lease, she had also read the terms of the lease and understood the terms and obligations. Therefore there was held to be an objectively manifested intention to be legally bound by the lease and all its terms.

The director in this case was ordered to pay $71,990.10 in her personal capacity as a guarantor under the lease.

These cases are a careful reminder to tenants and landlords in the Canberra region. With the booming construction sector comes more premises to be leased and rented. It is important to remember to be careful in drafting leases correctly and to know your rights and obligations when signing and down the track if things go wrong.

Lease disputes in the Australian Capital Territory are usually heard in the Magistrates Court (regardless of the amount in dispute) pursuant to jurisdiction prescribed by the Leases (Commercial and Retail) Act 2001 (ACT). It is also important to note that, in most instances, parties in lease disputes in the Australian Capital Territory must bear their own legal costs. Exceptions may apply insofar as the court does have a discretionary power to award costs though, frankly, such discretion is rarely exercised.

For advice on personal guarantees in leases in the ACT please contact William Staples – Associate, or Ian Meagher – Director of Litigation and Dispute Resolution at BAL Lawyers.

This is a sponsored article, though all opinions are the author’s own. For more information on paid content, see our sponsored content policy.

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