When are you liable as a guarantor?

Thursday 25 July 2019

When are you liable as a guarantor?

A recent Dunedin case, Kung v DVD Advance Ltd [2018] NZHC 3319 illustrates the problems which could come with holding a guarantor liable if the terms of the lease or the guarantee are not sufficiently clear. It highlights the special care required when acting for a landlord, to ensure any personal guarantees are enforceable.

By an Agreement to Lease dated 18 November 2013, Ms Kung (“Kung”) agreed to grant DVD Advance Ltd (“DVD”) agreed to take a lease of Kung’s Dunedin property for DVD’s rental business. The agreement was signed on the then Auckland District Law Society (“ADLS”) Agreement to Lease form. Kung signed the agreement as landlord and Mr Ferguson, the sole director of DVD, signed on behalf of DVD as tenant. In addition, Ferguson hand wrote “Gauranteed (sic) by DANIEL FERGUSON” and signed next to it.

There were two clauses in the Agreement to Lease that were relevant as follows:

1. Clause 4 stated that the tenant shall enter into a formal lease with the landlord on covenants “no more onerous than those contained in the Auckland District Law Society Commercial Lease Form 3^rd Edition 1993”.
    
2. Clause 6 stated that where the tenant is a company, and if the landlord requires, the tenant shall arrange for its shareholders to guarantee the obligations of the tenant. Clause 6 was the only reference to a guarantee in the agreement besides the handwritten addition of Ferguson.

Kung’s solicitors prepared a formal Deed of Lease in the 6^th Edition of the ADLS Deed of Lease form. It included a provision for Ferguson to enter into it as guarantor in the usual guarantee provisions. They submitted the lease to Ferguson’s solicitors but the Deed of Lease was never signed.

Unfortunately, by late 2015, DVD had fallen into arrears for unpaid rent and outgoings. On 23 May 2016, a flood caused by a blocked drain rendered the premises unhabitable. DVD accepted liability for rent and outgoings up to 23 May 2016 but argued that the lease was terminated after that. Ferguson denied liability altogether.

The important question at the High Court was whether Ferguson was liable as a guarantor. The landlord Kung’s lawyers argued that Ferguson was liable as a guarantor on two grounds:

1. That under Clause 6 of the Agreement to Lease, the tenant has to arrange for its shareholders to guarantee the obligations of the tenant.

2. That Ferguson had signed the Agreement to Lease stating that he guaranteed the lease.

The Court held as follows:

1. As to the first argument, the Court followed the Honk Land Limited v Featherston line of cases. Where no formal Deed of Lease was executed, then the terms of the formal deed of lease were held not to be certain enough. All that was stipulated in the Agreement to Lease was that the terms would be no “more onerous” than those in the ADLS standard form lease. On that basis, Ferguson was found not be liable as a guarantor due to a lack of certainty of the terms of the lease and therefore what he is guaranteeing under that heading.

2. As to the second argument, Ferguson was held to be liable. His handwritten statement of intention to guarantee evidenced a sufficiently clear intention to do so. As such, this meets the requirements of Section 27 of the Property Law Act which requires the contacts of guarantee to be in writing and signed. The Court held that as this basis is not dependent on Clause 6 of the Agreement to Lease, and therefore failure by the other shareholders to guarantee is immaterial. Clause 6 states that the tenant will arrange of its shareholders to guarantee the obligations of the tenant. In this case the landlord is relying on Ferguson’s handwritten guarantee.

It should be noted that the latest version of the ADLS Agreement to Lease contains operative guarantee provisions and provides for the guarantor to sign as a party. These provisions include an obligation to sign the lease as guarantor. Also, the latest version of the agreement specifies that the form of lease to be used is the current ADLS Lease form. This therefore provides the certainty which the agreement in the Kung v DVD Advance Ltd case did not have.

However, when examining old agreements to leases which were entered into some time ago, there could still be the danger that a guarantor is not bound if a Deed of Lease had not been entered into, with the guarantor signing as a guarantor. It is not sufficient if they sign only as a director of the tenant. A guarantor must sign any renewal deed to ensure that they are bound under any renewed term of the lease.

The above again highlights how important it is to enter into formal deeds of lease especially where guarantors are involved.

If you have any questions, please contact Teresa Chan at teresa@tchanlaw.co.nz or (03) 477 1069.

Teresa Chan

25 July 2019

The above article is for general information only. For specific advice, please contact Teresa Chan at Teresa Chan Law Limited.