Australia: Guarantees Invalidated Due to Incomplete or Inadequate Documentation

Guarantees disappear like magic - Barecall Pty Ltd v Hoban [2009] NSWSC 1104

In a recent NSW Supreme Court case, a landlord lost the right to claim over $1.3 million from the guarantors of a lease because of incomplete and inadequate documentation.

Background

The lessee was granted a lease and a sublease of premises in Manly to be used as a nightclub/restaurant. Manly Council owned some parts of the leased premises - hence the need for a sublease

Initially, the lease contained personal guarantees from three directors of the lessee company. The lease (both headlease and sublease) was varied to change the permitted use slightly and to provide for a greater area and additional rent. The variation introduced two new guarantors. The lessee went into liquidation towards the end of the first term of the lease leaving substantial debts. The landlord made a claim against the guarantor.

Documentation

The initial lease contained three personal guarantees (Hardy, Hoban and Harvey). The variation contained execution clauses for five personal guarantees, (Hardy, Hoban, Harvey, Rossi and Spadina), however, only Rossi and Spadina signed as guarantors, and Hoban only signed as director. Hardy and Harvey did not sign.

The variation did not amend the list of guarantors in the initial lease so as to include the new guarantors (Rossi and Spadina), and there was no guarantee clause in the variation document. The court found that all five guarantees were completely ineffectual, and the landlord could not claim against any of them.

Rossi and Spadina

These two individuals were new to the business at the time of the variation. They agreed to provide personal guarantees to the lease, and their names were listed on the execution page of the variation. They both signed the execution page.

The variation did not contain a guarantee clause, which was not fatal to the guarantees because the court remarked that people signing a variation of lease know that many terms are to be found in the lease being varied. However, the variation did not amend the reference schedule of the lease to include Rossi and Spadina in the list of guarantors.

The court found that even though they signed the variation, which would usually mean they were parties to the contract, there was no mention of them in the contract so their obligations were not identifiable.

The guarantees of Rossi and Spadina were ineffective.

Hardy and Harvey

These two signed the initial lease and were listed in that document's reference schedule as guarantors. There was space provided for them to sign on the variation, however they did not sign.

The court, following the 1987 High Court decision of Ankor v Westminster Finance (Australia), found that a creditor cannot enforce a guarantee if the guarantee has been varied in a way that increases the guarantor's risk unless the guarantor has signed the variation. The lease had been varied to increase the leased area and the rent. This increased the risk, so the original guarantees in the lease were discharged. The landlord could not even claim any rent owed based on Hardy and Harvey's liability under the initial lease.

Hoban

Hoban signed the original lease, was listed in the reference schedule and signed the variation. He only signed the variation as a director, but the court found that this at least showed that he was aware of the variation and consented to it.

Although it seems that Hoban's guarantee has no major flaws, it was discharged and ineffectual because the variation was supposed to include a guarantee from all five people listed. The court relied on the 1985 case Marston v Charles H Griffith & Co Pty Ltd as authority that where there is an express or implied term in a guarantee that more than one person will be providing the guarantee, then the guarantee is only effective if all the proposed guarantors sign up properly.

Hardy and Harvey did not sign the execution page in the variation, so Hoban's guarantee was ineffective.

Lessons

This case reads like a magic trick -the guarantee of Hoban seems valid right up to the end, but it disappears with the others.

Landlords must be careful that all guarantees are correctly documented, because if one is not executed, the other guarantees may be ineffectual as a result.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.