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A Game of Cards: Do Security Bonds Trump Personal Guarantees in a Commercial Lease?

Posted by Dean Claughton on 25 Jun 2015

The best laid plans of mice and men can go astray. Before agreeing to act as guarantor for a tenant, make sure you know what you may personally be liable for if things don’t go according to plan.

The decision from the New South Wales Supreme Court in Padstow Corporation Pty Ltd v Fleming (No 3) [2013] NSWSC 24 illustrates the position you could find yourself in if a tenant breaches their lease.

Fleming leased commercial premises from Padstow for eight years. Fleming had its obligations guaranteed by its directors and, under the lease, the guarantors did not need to provide personal guarantees if the tenant paid a security bond equivalent to three months’ rent – something Padstow failed to do.

With rent in arrears, liquidators disclaimed the lease and the Landlord took possession of the premises so the amount payable by the guarantors to the Landlord then came into question.

The guarantors argued that their personal liability should be equal to the value of the security bond Fleming should have provided. Unfortunately the New South Wales Supreme Court found otherwise - the court held that the guarantee was unlimited as to the amount.

Consider this case an example of the dangerous hand that personal guarantors can be dealt if a tenant fails to live up to their end of the bargain – before making the leap you should be fully aware of the extent of your liability and the consequences associated with an unlimited personal guarantee.

For any questions regarding the risks associated with personal guarantees, please contact the Coleman Greig Commercial Property team: