When a businessperson negotiates a lease of a shop, their focus is on the rent, the rent free period, the term, the options to renew, the security bond and the permitted use.
The personal guarantee for the rent is an afterthought, unless giving one means a 1 month security bond is negotiated instead of 3 months security bond without one. The fact that giving a director's guarantee removes the asset protection of leasing in a company name is rarely considered.
Fast forward, and for whatever reason, the business is going bad because it cannot make enough sales. The tenant falls behind on their rent. The landlord terminates the lease.
What was once an afterthought becomes the major source of financial stress as the landlord pursues the director's personal guarantee: for rent up to the lease termination, then for rent lost until the shop is re-rented, and finally for make good expenses. Legally, there are few defences to claims made by landlords under personal guarantees.
Two recent decisions by the NSW Court of Appeal demonstrate how financially ruinous a personal guarantee can be:
- The directors of the ex-tenant - Panetta Fruits at Westfield Miranda were ordered to pay $3,674,555.53 under their personal guarantees, which was equivalent to over 3 years rent.
- The director of the ex-tenant - Circa Newsagency at CircaRetail Bella Vista was ordered to pay $602,178.35 which was equivalent to several years rent.
What options does a tenant have when the landlord demands a personal guarantee? The best option is to offer more security bond - 3 months is common - instead of a personal guarantee. The second best option is to limit the personal guarantee to say 3 or 6 months. The third option is to walk away from the lease.
For my detailed comments on the two Court of Appeal decisions,