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Failure of a personal guarantee in an unregistered lease

Newsletter Article 04 April 2011

Introduction

Landlords taking a guarantee as security should be aware of the recent NSW Court of Appeal decision in Barecall Pty Limited v Hoban. The case confirmed that:

  • the guarantee was provided in respect of a ‘lease’ which was presumed to be a legal lease arising on registration. As the lease was not registered, the guarantee could not be enforced;
  • the representations of the tenant that the 5 directors would sign the guarantee were superseded by a subsequent letter advising that 2 of the 5 directors had not signed the guarantee; and
  • the 3 guarantors who signed were released on the basis that they signed on their expectation that all 5 guarantors would sign and the burden of the liability would be shared between the 5 guarantors.

Background

In 2001, Barecall Pty Limited (Barecall) granted a lease and sublease to Aqualounge Manly Pty Limited (Aqualounge) for premises in Manly. The directors of Aqualounge were required to personally guarantee Aqualounge’s performance of its obligations under that Lease. Ultimately, the Lease was never registered.

In March 2003, Aqualounge sought Barecall’s consent to change the permitted use of part of the premises and occupy additional space in the building. Barecall consented to the proposed change of use on the basis that the rent payable by Aqualounge would increase together with their proportion of outgoings. The directors of Aqualounge were also required to personally guarantee the performance of Aqualounge under the Variation of Lease.

In or about September 2003, Aqualounge took possession of the additional space without Variation of Lease documentation having been provided to Aqualounge let alone signed by all parties. On 3 October 2003, Barecall’s solicitors sent Aqualounge’s solicitors a Variation of Lease for signing by Aqualounge and 5 guarantors.

On 20 November 2003, Aqualounge’s solicitor advised Barecall’s solicitor that whilst 2 of the 5 guarantors had not yet signed the Variation of Lease, the remaining guarantors would arrange to sign the guarantee portion of the Variation of Lease at Barecall’s solicitor’s office. Barecall’s solicitor failed to pass this information onto Barecall and subsequently, Barecall continued to allow Aqualounge to occupy the additional premises without taking steps to have the remaining guarantors sign the Variation of Lease.

During 2005, Aqualounge fell into financial difficulty and on 20 June 2005, an external administrator was appointed to Aqualounge.

Barecall maintained that the guarantors should be estopped from denying their obligations under the Lease as varied and sought payment of the outstanding amounts due and payable by Aqualounge from the guarantors.

The Decision

The Court applied the principle in Chan v Creston [1]; which provides that a guarantee contained in an unregistered lease cannot apply to a common law tenancy at will (or any equitable lease). Therefore, as the Lease (as varied) did not expressly state that the guarantee would apply regardless of whether the Lease was registered, Barecall could not rely upon the guarantee.

Regardless of whether the Lease was registered, the principle in Marston [2] would still operate to release the 3 guarantors who signed the Variation of Lease from any liability on the basis that those guarantors only ever contemplated and agreed to sharing the burden of any liability between 5 guarantors, not the 3 who signed the document.

The Court confirmed that there was insufficient evidence to support Barecall’s argument of estoppel. Despite the fact that Barecall had no direct knowledge of the failure of 2 guarantors to sign the Variation of Lease, the Court determined that Barecall’s knowledge was to be equivalent to that of its solicitor. Therefore, Barecall continued to allow Aqualounge to occupy the additional premises without taking steps to have the remaining guarantors sign the Variation of Lease.

Conclusion

This decision highlights the importance of ensuring that lease documents are signed by all parties, including guarantors, (preferably prior to granting possession) and that the lease is registered, if required.


Penny Evans, Partner
Partner

Newsletter Article 04 April 2011
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