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 understand the extent of the guarantee they are providing and obtain appropriate legal advice to minimise financial exposure.
Case Studies Highlighting the Risks of Personal Guarantees
Two cases are important reminders of the risk that a director takes when guaranteeing the performance of a company’s obligations.
Lin v Solomon [2017] NSWCA 328
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.
NB2 Pty Ltd v P.T. Ltd [2018] NSWCA 10
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.
Understanding Joint and Several Liability
When multiple directors provide a personal guarantee, each may be held individually liable for the full amount. Third parties can pursue any of the directors for the outstanding liabilities, often targeting the one in the strongest financial position.
Protecting Your Personal Assets
Directors who sign personal guarantees should take proactive steps to protect their assets. Seeking legal advice on asset management and considering additional safeguards, such as higher bonds or bank guarantees, can reduce personal financial exposure.
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.
The information in this article is general in nature and does not constitute professional advice. 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 call 03 9670 7440 or email [email protected].