The Financial Risk In Giving Personal Guarantees In Leases

The financial risk in giving personal guarantees in leases

If you are a director of a company entering a commercial or retail lease, a landlord will likely require you to give a personal guarantee for the company’s obligations under the lease. In such cases, directors should fully comprehend the extent of the guarantee they are providing and obtain appropriate legal advice to minimise financial exposure.

Two recent cases are dire reminders of the risk that a director takes when guaranteeing the performance of a company’s obligations.

In Lin v Solomon [2017] NSWCA 328 the landlords were entitled to recover personally from the guarantor, after the lessee company defaulted under the lease. The landlords, who owned the CircaRetail Shopping Centre at Bella Vista, were awarded damages comprising unpaid rent, outgoings, contributions to the retail centre’s promotional levy and GST.

The guarantor claimed that he was ‘induced to enter into the guarantee of the lease by misleading and deceptive representations’ made by the leasing agent. The alleged misrepresentations were that the leased premises, comprising a newsagency, would soon attract increased foot traffic due to the predicted employment of some 1,500 people at a nearby site.

The Court found the misrepresentations as pleaded were not established and, in any event, there would have been no reliance on such representations as the guarantor was an experienced newsagent. In fact, apart from paying a deposit and providing a bank guarantee, the lessee company failed to make any lease payments or outgoings under the five-year lease which commenced in May 2009 and was terminated by re-entry by the lessors in December 2012.

The primary decision was upheld on appeal and the guarantor was ordered to pay the respondents the sum of $602,178.35 plus interest and costs

Incidental to the issue of the misrepresentation, but significant to the appeal, was the appellant’s allegations that the primary judge had not been impartial and should be recused from the case. The appellant was also unsuccessful on this point.

In NB2 Pty Ltd v P.T. Ltd [2018] NSWCA 10 the lessee / appellant challenged the primary judge’s decision to award payment of damages to the landlord / respondent after the lessee company breached the lease.

The lessee had entered a ten-year lease for a fruit and vegetable shop at Westfield Shopping Centre, Miranda. After defaulting in paying rent, the lease was terminated by the landlord which then sued the lessee company and the guarantors under the lease.

In the primary hearing, the appellant claimed that it had been misled by the landlord during negotiations after expiry of its previous lease, when it promised the lessee exclusivity as the ‘sole independent speciality fruit and vegetable retailer’ within a defined area at the centre. Subsequently, nearby Franklins re-opened its refurbished premises selling fresh fruit and vegetables, which detrimentally affected the lessee’s turnover.

The alleged misrepresentations were not made out. The Court considered that the expression ‘sole independent fruit and vegetable retailer’ did not constitute retailers such as Franklins as it was not a ‘specialty retailer’.

The primary judge entered judgment in favour of the landlords for $3,537,040.50 against the two directors of the lessee company. This was upheld on appeal and the appellants were ordered to pay the respondent’s costs.

Joint and several liability

As many companies have more than one director, both or all directors are usually required to guarantee the company’s performance of a contract with a third party. In such cases, it is important to understand that the third party will be able to call upon either one or all of the joint guarantors for the outstanding liabilities of the company.

The third party need not exhaust all options to recover the debt against the company and will usually pursue the director/s in the most favourable financial position.

Directors who give guarantees should seek legal advice regarding appropriate asset management to safeguard personal assets.

Conclusion

A guarantor is at considerable risk of personal exposure if the company is unable to meet its responsibilities under a contract, and in such cases may face financial disaster.

Personal guarantees for lessee companies can seldom be avoided. However, the risk for guarantors may be minimised by paying a higher bond or arranging a bank guarantee in exchange for limiting the guarantor’s financial exposure.

Companies and their directors are advised to obtain legal assistance before entering a leasing arrangement and independent advice regarding the extent of their personal obligations under a guarantee arrangement.

It’s easy to let the prospect of a new venture curtail a comprehensive review of the terms of a lease, however these cases provide thoughtful insight into the importance of treading carefully when it comes to guarantees.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or email .