Do personal guarantees apply after lease termination and the creation of a monthly tenancy?
The issue of whether personal guarantees continue to apply following the termination of a lease and creation of a monthly tenancy was recently addressed in APlus Capital Pty Ltd v Kontomichalos [2024] VSC 546 on appeal from a decision of the Victorian Civil and Administrative Tribunal (VCAT).
Case background
- APlus Capital (APlus) were tenants of a serviced apartment complex in Kew, Melbourne. Following a disagreement over proposed bathroom works, it withheld rental payments, thereby repudiating each lease. The leases were terminated on 3 September 2018. However, APlus continued to trade and occupy the apartments, thereby creating month-to-month tenancies until January 2019.
- In an effort to recover outstanding rent and charges, the landlords initiated proceedings against APlus and its director, Ximeng Zhao, and secretary, Robert Ian Dunstan, who had acted as guarantors for guarantees contained in transfer of lease deeds (Deeds).
- In response, APlus filed a counterclaim, seeking damages and a declaration that they were entitled to withhold the rent because the landlords had not paid for the repair works.
Tribunal’s findings
On 20 September 2022, senior member Forde of the VCAT dismissed APlus’ counterclaim, ordering it to pay $209,395.67 to the landlord. SM Forde held that:
- APlus had failed to establish the landlord’s obligation to pay for the proposed bathroom renovations and did not have the right to offset rent against the cost of these works
- APlus had repudiated the leases by withholding rent prior to 3 September 2018
- APlus had continued to occupy the premises pursuant to monthly tenancies “on the same terms as” the original Deeds
- APlus’ guarantors, Zhao and Dunstan, were therefore liable for the amounts payable by APlus to the landlords.
Supreme Court judgment
On appeal, APlus’ guarantors argued that their guarantees were only applicable to the original leases, not the monthly tenancies. This was swiftly rejected by Ginnane J. Upholding the Tribunal’s decision, His Honour held that:
- the terms of the leases required the tenant to pay rent and do everything required by the leases during the lease term and any period it remained in occupation after the leases ended (clause 3)
- under the guarantees, the guarantors guaranteed that the tenant would “pay the rent promptly”. This includes rent accrued after the leases ended
- a reasonable business person interpreting the guarantees would have taken into account the fact that the parties contemplated that APlus might continue in possession after the leases ended, in which case “they would be obliged to pay the rent and do everything else required by the Deeds”
- the Tribunal gave the parties a sufficient opportunity to address the issue of the guarantors’ liability during the initial hearing, meaning it did not err in refusing further submissions from APlus on 29 November 2022.
Key takeaways
This case illustrates the importance of the context in which a guarantee is entered, particularly the surrounding circumstances known to both parties at the time of the transaction. The terms of a guarantee will determine whether the liability of the surety extends beyond the expiration of an agreement.
Leases commonly include clauses about continued occupation after the lease expires or is terminated. Guarantors should be aware that such obligations are likely to be captured in well-drafted guarantee provisions. Landlords should ensure their guarantee provisions are drafted to capture the entirety of any occupancy of the tenant.
For tenants: absent express provisions, this case reinforces that it is highly likely that a failure to pay rent will amount to a repudiation of the lease. Withholding rent carries significant risks and should only be pursued with caution, ideally with the guidance of expert legal advice and strategy.
The importance of getting legal advice before providing a guarantee and indemnity under a lease
When entering into an Agreement to Lease or a Lease where the Tenant is a Company or Trustee, the Landlord may ask for due performance of Tenant’s obligations by way of personal guarantees. The directors, trustees, beneficiaries or shareholders usually provide these guarantees. Landlords ask for guarantees due to the commercial and trading nature of trusts and companies.
An individual providing a guarantee is entering into a covenant with the Landlord to perform all the Tenant’s obligations under the Lease in the event of the Tenant’s default. These guarantees need to be read carefully before signing because in most instances the Landlord can demand performance from the guarantor prior to enforcing a default against the Tenant.
Furthermore, guarantors need to be careful in the circumstances because most guarantees provided also incorporate an indemnity allowing the Landlord to recover almost all costs in connection with the issuing and recovery of any default against the Tenant. It is best to provide guarantees and indemnities that can only be enforced once a Landlord has reasonably perused the Tenant for payment of the default.
The best commercial practice from a Tenant’s point of view is to offer a cash bond or Bank Guarantee at a much higher rate in exchange for not providing personal guarantees. Prior to entering into a Lease the Guarantor should seek advice from their accountant to ascertain the assets that are held in their name personally that would be at risk by giving the Guarantee.
How NB Commercial Lawyers can assist?
Our experienced commercial lawyers can provide you with practical and pragmatic commercial advice on any form of contract, lease or commercial agreement. Please contact us on (07) 3876 5111 or email [email protected] to discuss further.