Risky business: directors 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 provide, and obtain appropriate legal advice to minimise financial exposure.

The following cases are reminders of the risks that a director takes when guaranteeing the performance of a company’s obligations.

Newsagency Lease

In Lin v Solomon [2017] NSWCA 328, the landlords were entitled to recover personally from the guarantor after the tenant company defaulted under the lease. The landlords, who owned the CircaRetail Shopping Centre in Bella Vista, were awarded $602,178.35 plus interest and costs in 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 main misrepresentation alleged was 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 guarantor did not establish that the misrepresentations as claimed were made and, in any event, the guarantor would not have relied on the representation because he was an experienced newsagent.

Fruit and Vegetable Shop Lease

In NB2 Pty Ltd v P.T. Ltd [2018] NSWCA 10, a tenant and two director guarantors challenged the Supreme Court’s decision to award damages of $3,537,040.50 to a landlord.

The tenant had entered a 10 year lease for a fruit and vegetable shop at Westfield Shopping Centre in Miranda. After defaulting in paying rent, the landlord terminated the lease, and then sued the tenant and the guarantors under the lease.

The tenant claimed that it had been misled by the landlord during negotiations because the landlord promised the tenant exclusivity as the ‘sole independent speciality fruit and vegetable retailer’ within a defined area at the centre. Subsequently, a nearby shop selling fresh fruit and vegetables was opened by Franklins, which detrimentally affected the tenant’s turnover.

The tenant did not establish that the representations were made. Further, the Court considered that the expression ‘sole independent fruit and vegetable retailer’ did not constitute retailers such as Franklins because it was not a ‘specialty retailer’.

Joint and several liability

All directors of a company 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 usually be able to call upon either one or all of the joint guarantors for the company’s outstanding liabilities.

The third party is usually not required to exhaust all options to recover the debt against the company, and will usually pursue the director that is 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. In such cases, it may face financial disaster.

Directors often cannot avoid giving personal guarantees for tenant companies. However, the personal risk for guarantors can be minimised by, for example, paying a higher bond or arranging a bank guarantee in exchange for limiting the guarantor’s financial exposure.

Companies and their directors should obtain legal assistance before entering a lease, including 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.

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