Personal Guarantee Liabilities in Property Lease Struck Out for Incomplete Documentation
PDF DOWNLOADIn the case of Barecall Pty Limited v Hoban [2009] NSWSC 1104 (16 October 2009), the NSW Supreme Court held that a landlord could not claim under personal guarantees given by directors of the tenant due to certain technical and procedural irregularities in the terms of the guarantee and underlying lease.
Facts
The case was a claim for debt arising from personal guarantees given by directors of the tenant (Tenant) under a commercial lease of a restaurant/nightclub in Manly.
The plaintiff, Barecall Pty Limited (Landlord), entered into a lease and a sublease with several directors of a restaurant/nightclub called Aqualounge on 29 January 2002. The Landlord asked for personal guarantees from the directors of the Tenant but only three of the five directors (Harvey, Hoban and Hardy) signed the guarantees. The lease was stamped but not registered.
On 1 September 2003, Aqualounge took up additional space on the first floor of the building which increased the rented area and rent. Two new directors, Spadina and Lussick, were also appointed to the Tenant.
A variation of lease was drawn up but only two of the directors of the Tenant (Rossi and Spadina) signed as guarantors. The variation was also stamped but not registered.
The business did not go well and Aqualounge went into administration on 20 June 2005. The Landlord sued for rent, outgoings and damages owed by directors under their personal guarantees in respect to the initial lease and the variation of the lease.
Judgment
With respect to the two directors, Harvey and Hardy, who signed as guarantors in the initial lease, the Court found that where there was a substantial alteration of the lease being guaranteed resulting in increased liability for the guarantors; the liability of the guarantors under the original lease could be discharged if the guarantors did not give consent to the alteration. Accordingly, the Court held that the directors were relieved from any liability because they did not sign the variation of the lease.
Hoban was the only director who signed the original lease as a guarantor and as director in the variation of the lease. However, he was also held not liable because the lease guarantee had to be signed by all the other co-guarantors.
Two other directors, Rossi and Spadina, signed the variation of the lease in their personal capacity. However, the court found that the variation did not amend the reference schedule in the original lease, so their obligations were not identifiable which rendered their guarantee ineffective.
Comment
This decision points out the importance and necessity of proper procedure and documentation in commercial leases, the failure of which may result in guarantees being ineffective.
This decision also emphasises the strict and formal approach courts take when interpreting personal guarantees. If there are any procedural irregularities in the terms or form of the guarantee or the underlying document, there is a risk that the guarantee may be struck out.
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