VIC Can I Stop Being Guarantor in Commercial Lease?

[san2]

Hi,

I signed as a Guarantor in a commercial lease agreement, and other two directors of the company signed as Guarantors as well. The investment in the company varies. Initially, I held about 15% shares and the rest with other two directors.

Recently, the company needed more investment which I could not pay for, so the other two directors agreed to take my 10% shares. Now, I am remained with 5% of shares. I am not sure whether to stay as a Director or not. The company is currently running ok (paying bills, wages) but I have realised it will not sustain for long. The other two directors are hopeful and want to carry it long.

Secondly, the Lease agreement is so detailed and put several conditions on its guarantors. Our solicitor initially did not advise of any risks while signing and other two directors told me that it is a standard document. We also have bank guarantee equivalent to 6 months’ Rent as a condition of Lease. The lease agreement is for 5 years.

As of now, since I have significantly lower shares in the business I don’t see a point staying as equal guarantors. Further, even if I leave the company and not worry about my shares, I was reading somewhere that I am still liable as a guarantor.

Is there any way I can end being a guarantor?

I have invested my hard earned savings thinking it will be able to give me some return and I can put a deposit towards my first house. Now, the investment is almost gone and I believe this guarantor condition will take everything from me one day.

I looking for answers so that I can face my 8 months old daughter and wife that their future will not be ruined because of my costly mistake.


Please help

 

[Victoria S]

You have signed a contract, so in order to get out of your obligations before the lease is up, you will have to get the other party - the lessor - to agree to let you out. The guarantee is completely independent of the fact that you are a director. Simply ceasing to be a director has no bearing on your liability as a guarantor under the lease.

 

[Rod]

And have you signed a deed of cross-indemnity with the other directors? If so, they will need to agree to release you from the cross indemnity.

 

[Tim W]

Apart from being a guarantor, are you a party to the lease personally?

 

[san2]

Hi Tim,

I am not sure what it means to be a "party to the lease personally" but I have signed lease agreement as a one of the Director of the company and as a Guarantor. The other two directors did the same. The company is the tenant.


I have copied a snippet from the agreement here,


“

37 Guarantee and Indemnity

37.1 Guarantor’s obligations

In consideration of the Landlord entering into this Lease with the Tenant at the Guarantor's request, the Guarantor:

37.1.1 guarantees that the Tenant will perform all its obligations under this Lease, any renewed lease, and during any period of holding over;

• 37.1.2 must pay the Landlord on demand any money owing to the Landlord by the Tenant; and
• 37.1.3 indemnifies the Landlord against all loss resulting from the Landlord having entered into this Lease, whether from the Tenant's breach of any provision of this Lease, or from this Lease being or becoming unenforceable against the Tenant.

• 37.2 Liability not affected
  The Guarantor's liability is not affected by:
  • 37.2.1 the Landlord granting the Tenant or any Guarantor any time or other indulgence;
  • 37.2.2 the Landlord agreeing not to sue the Tenant or any Guarantor;
  • 37.2.3 any assignment (whether by the Landlord or the Tenant), sub-lease or variation of this Lease;
  • 37.2.4 any provision of this Lease being or being found to be unenforceable;
  • 37.2.5 the renewal of this Lease; or
  • 37.2.6 this Lease not being signed, or not being signed correctly, by any one Guarantor.

“

Hope it is useful.

 

[Tim W]

I am not sure what it means to be a "party to the lease personally".....

If you were, you'd know.

While I defer to my Victorian colleagues, who will be further across the fine detail of commercial leases in that state than I am,
as a general proposition, a change of guarantor involves a change of one (or several) of the terms of the lease,
and therefore, would require the consent of the other parties.

Ask yourself - to whom are you giving the guarantee?
If it was to the tenant (which would be unusual in a commercial tenancy),
then you'd be able to negotiate that with them directly - it would not affect the lease itself.

But if (as happens more often), you have provided your personal guarantee to the landlord,
and that has been one of the terms of the lease, then you'd have to negotiate it with the parties.
You'd start by giving notice to the tenant that you are no longer inclined to act as guarantor.

The main game here is for you to not be guarantor when this business goes bust.
I suggest getting your own lawyer to assist you with this. I have two reasons.

• for all but the most sophisticated players, the work is too complex to be a DIY;
• you are clearly dealing with people in your business who have "no idea".

 

[Serge Gorval]

If your business partners, remaining 2 directors, are prepared to indemnify you then this can easily be executed by a 3 party deed.

The landlord could still bring a claim against you personally, but if you have a deed whereby the others are indemnifying you then you will be fine.

 

[Tim W]

if your business partners, remaining 2 directors, are prepared to indemnify you then this can easily be executed by a 3 party deed.

the landlord could still bring a claim against you personally, but if you have a deed whereby the others are indemnifying you then you will be fine.

As long as the business is a solvent going concern, and you can persuade the others in the business to do it, then yeah.

But, if there's anything behind your phrases "...needed more investment..." and "...but I have realised it will not sustain for long...",
then you need to start planning for when this thing goes south.

The main game here is for you to not be guarantor when this business goes bust.