OFTEN WHERE A COMPANY ENTERS A COMMERCIAL LEASE AS A TENANT, THERE WILL A REQUIREMENT BY THE LANDLORD THAT THE DIRECTORS AND SOMETIMES EVEN THE SHAREHOLDERS OF THE CORPORATE TENANT ARE TO PROVIDE SECURITY TO THE LANDLORD IN THE FORM OF A GUARANTEE.
A guarantee is a written promise to guarantee the liability and obligations of one party to another party. In the form of a lease, the guarantors will be guaranteeing to the landlord the obligations of the tenant under the lease including the payment of rent.
WHAT TO BE AWARE OF IF YOU ARE SIGNING A PERSONAL GUARANTEE ON BEHALF OF YOUR COMPANY
To protect yourself when signing lease documents it is important that you read and understand all clauses contained therein and understand the obligations of the tenant that you are guaranteeing.
A landlord will often recommend and in some instances insist that a person providing a guarantee seeks independent legal advice on the terms of the guarantee. This is done to ensure that the guarantor understands the legal ramifications of signing the guarantee and cannot at a later stage raise a defence on the basis of “not knowing what was being signed”.
Guarantees are almost always continuing guarantees, which means that the guarantee continues and cannot simply be terminated by the guarantor or be released from the guarantee when it chooses without the express written approval from the landlord, who has the benefit of the guarantee. This situation often arises when a director who provided a guarantee resigns as a director or is removed as a director, the guarantee will still continue despite this. In such a situation, it will be the onus of the guarantor to seek the release from the landlord and failing that obtaining an indemnity from the tenant or other remaining guarantors.
If there are more than one guarantors, then the guarantee is almost always a joint and several guarantee which means the landlord can if required sue one of the guarantors severally or all the guarantors jointly.
A guarantee needs to be validly executed in order to be enforceable. As such if a guarantor is an individual then the guarantor must execute the guarantee in the presence of an independent witness over the age of 18 years old and that witness must also execute the guarantee in the execution clause. If the guarantor is a corporate entity, then the company needs to validly execute the guarantee by having the sole director execute the guarantee if the company only has one director or two directors if the company has more than one director or under a valid company seal or valid power of attorney.
In summary it is important to ensure that a guarantee is valid and enforceable and such factors to ensure enforceability include:
- That the guarantee is in writing;
- The guarantee is dated;
- Has clearly been marked as a "guarantee";
- The guarantor has been provided the opportunity to seek independent legal advice on the terms of the guarantee and their ramifications and can take the guaranteee away to seek such advice;
- The guarantee is validly executed
If you are a landlord and looking to have a guarantee added to a lease or you are asked to execute a guarantee on behalf of a tenant to a lease or you have legal questions regarding your rights under a guarantee, please don’t hesitate to contact JHK Legal and we can provide you with a tailored written advice to your needs.
Contact us at JHK Legal. 02 8239 9600 or visit JHKlegal.com.au
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