The financial risk in giving personal guarantees in leases

If you are a director of a company entering a commercial or retail lease, a landlord will likely require you to give a personal guarantee for the company’s obligations under the lease. In such cases, directors should fully understand the extent of the guarantee they are providing and obtain appropriate legal advice to minimise financial exposure.

Two cases are important reminders of the risk that a director takes when guaranteeing the performance of a company’s obligations.

In Lin v Solomon [2017] NSWCA 328 the landlords were entitled to recover personally from the guarantor, after the lessee company defaulted under the lease. The landlords, who owned the CircaRetail Shopping Centre at Bella Vista, were awarded damages comprising unpaid rent, outgoings, contributions to the retail centre’s promotional levy and GST.

The guarantor claimed that he was ‘induced to enter into the guarantee of the lease by misleading and deceptive representations’ made by the leasing agent. The alleged misrepresentations were that the leased premises, comprising a newsagency, would soon attract increased foot traffic due to the predicted employment of some 1,500 people at a nearby site.

The Court found the misrepresentations as pleaded were not established and, in any event, there would have been no reliance on such representations as the guarantor was an experienced newsagent. In fact, apart from paying a deposit and providing a bank guarantee, the lessee company failed to make any lease payments or outgoings under the five-year lease which commenced in May 2009 and was terminated by re-entry by the lessors in December 2012.

The primary decision was upheld on appeal and the guarantor was ordered to pay the respondents the sum of $602,178.35 plus interest and costs.

In NB2 Pty Ltd v P.T. Ltd [2018] NSWCA 10 the lessee/appellant challenged the primary judge’s decision to award payment of damages to the landlord/respondent after the lessee company breached the lease.

The lessee had entered a ten-year lease for a fruit and vegetable shop at Westfield Shopping Centre, Miranda. After defaulting in paying rent, the lease was terminated by the landlord which then sued the lessee company and the guarantors under the lease.

In the primary hearing, the appellant claimed that it had been misled by the landlord during negotiations after expiry of its previous lease, when it promised the lessee exclusivity as the ‘sole independent speciality fruit and vegetable retailer’ within a defined area at the centre. Subsequently, nearby Franklins re-opened its refurbished premises selling fresh fruit and vegetables, which detrimentally affected the lessee’s turnover.

The alleged misrepresentations were not made out. The Court considered that the expression ‘sole independent fruit and vegetable retailer’ did not constitute retailers such as Franklins as it was not a ‘specialty retailer’.

The primary judge entered judgment in favour of the landlords for $3,537,040.50 against the two directors of the lessee company. This was upheld on appeal and the appellants were ordered to pay the respondent’s costs.

Joint and several liability

As many companies have more than one director, both or all directors are usually required to guarantee the company’s performance of a contract with a third party. In such cases, it is important to understand that the third party will be able to call upon either one or all of the joint guarantors for the outstanding liabilities of the company.

Generally, the third party need not exhaust all options to recover the debt against the company and will usually pursue the director/s in the most favourable financial position.

Directors who give guarantees should seek legal advice regarding appropriate asset management to safeguard personal assets.

Conclusion

A guarantor is at considerable risk of personal exposure if the company is unable to meet its responsibilities under a contract, and in such cases may face financial disaster.

Personal guarantees for lessee companies can seldom be avoided. However, the risk for guarantors may be minimised by paying a higher bond or arranging a bank guarantee in exchange for limiting the guarantor’s financial exposure.

The information in this article is general in nature and does not constitute professional advice. Companies and their directors are advised to obtain legal assistance before entering a leasing arrangement and independent advice regarding the extent of their personal obligations under a guarantee arrangement.

It’s easy to let the prospect of a new venture curtail a comprehensive review of the terms of a lease, however these cases provide thoughtful insight into the importance of treading carefully when it comes to guarantees.

If you or someone you know wants more information or needs help or advice, please contact us on (08) 8155 5322 or email [email protected].

Is a testamentary trust right for you?

One of the most loving things that you can do for your family is make plans for what happens after you die. This is particularly important if you have children or vulnerable adults who depend on you financially. A testamentary trust might be the right tool to help you look after those you love.

What is a testamentary trust?

As the name suggests, a testamentary trust is made under a will and begins at the death of the testator (the will-maker). This tool allows you to financially support someone without giving that person direct control of the assets.

How is a testamentary trust made?

Your solicitor can draft your trust. Before speaking to your solicitor, you should think about what you want to include in the trust (the assets or capital), who you want to benefit from the trust (the beneficiaries), and who you can rely upon to carry out your wishes (the trustee or trustees).

A common arrangement for parents of young children is to incorporate all assets (including property and superannuation) into a trust for the benefit of their children. In that scenario the trustees might also be nominated as the guardians of the children.

Who should you choose as a trustee?

The trustee is the legal owner of the assets of the trust, so the most important thing is to ensure that the trustee is reliable and honest. Having more than one trustee can be good insurance against fraud or carelessness.

In some cases, the size or contents of an estate may justify an expert trustee. A trustee can be a professional (such as an accountant or lawyer) or an organisation (such as the NSW Trustee and Guardian). However, a professional trustee does need to be paid out of the estate.

What are the advantages of a testamentary trust?

A testamentary trust allows a will maker to control the distribution of their assets for up to 80 years. This lets you look after your children, grandchildren, and even great-grandchildren! There are many advantages to this type of arrangement.

Protection

A testamentary trust can be very prescriptive. You can set out exactly how your money should be divided between the beneficiaries, when the money is given out, and even what it can be spent on. This can prevent the capital from being frittered away by beneficiaries with mental health conditions or addictions.

Because the trustee legally owns the assets of a trust, the funds are generally protected from outside claims against the beneficiaries. For instance, the trust is usually not vulnerable during family law litigation (ie the capital in the trust is unlikely to be split in a divorce). Similarly, the capital is generally insulated from bankruptcy, as well as personal injury and professional negligence claims.

Flexibility

You can choose to make your testamentary trust discretionary. In that case, the trustee has some freedom in distributing the income and capital of the trust. For instance, your trustee may distribute the trust based on the different needs of each child through the years. This allows the trust to evolve over time as circumstances change.

Minimise Tax and Capital Gains

There are tax benefits from testamentary trusts, which you should discuss with your solicitor and accountant. In short, trustees may be able to distribute from a discretionary trust in tax-effective ways, including taking advantage of five-year averaging for capital gains losses. In addition, under a testamentary trust, minor children receive beneficiary tax rates for income from the trust.

Are there any disadvantages to a testamentary trust?

As with all forms of estate planning, a testamentary trust is not right for everyone.

The administration of a trust costs money each year that the trust operates. This will include annual tax and auditing costs and could also include the trustee’s professional fees. For this reason, a discretionary trust is not usually the best option for smaller estates.

A testamentary trust can be challenged by those who wish to receive immediate access to their inheritance. Regardless of whether the claim is successful, the process will cost the estate additional legal fees and may cause family conflict. A testamentary trust always involves a degree of ongoing interaction between the trustee/s and the beneficiary/ies. As with any family dynamic, this can be a source of tension and conflict.

Finally, income from a trust is used when calculating income for Centrelink income support benefits (although currently the assets of a trust are not used to determine eligibility under the asset test).

Conclusion

There are many benefits to using a testamentary trust to protect your loved ones. This form of estate planning allows you to protect your estate against outside claims and ensure that your wealth is used to benefit those you love. There are some disadvantages to choosing a testamentary trust, so it is important to speak to your solicitor and accountant before deciding whether this option is right for you.

This is general information only and we recommend you obtain professional advice relevant to your circumstances.

If you or someone you know wants more information or needs help or advice, please contact us on (08) 8155 5322 or email [email protected].

Family law and financial abuse

Financial abuse occurs where a person uses systematic coercion to control another family member’s access to money or assets, whether the victim of the financial abuse is currently in, or was in, an intimate relationship with the perpetrator. Financial abuse is considered a form of domestic violence.

There is recourse and assistance available for people who are experiencing financial abuse.

This information is for general purposes only and we recommend obtaining professional advice relevant to your circumstances.

What is considered financial abuse?

Financial abuse occurs usually between intimate partners, when one controls or manipulates the other person’s access to finances, assets and decision-making to create dependence and control such as:

• restricting another person’s access to bank accounts;
• completely controlling their finances and money or forbidding a partner to work or make their own money;
• not allowing a partner to use their own money or taking it away from them;
• monitoring how a partner spends money or makes financial decisions;
• using a partner’s money without their permission.

Financial abuse can be subtle or overt and is often not the only type of violence perpetuated against a partner. It can be accompanied by other types of abuse such as physical violence. Perpetrators of family violence usually use financial abuse as a means of stripping a victim of resources to leave the abusive relationship.

Examples of financial abuse

An example of financial abuse can occur where a spouse relies on the other spouse to earn an income for their family. The other spouse constantly pretends they’re searching for a job while in actual fact, they are instead at a friend’s house, or out indulging in leisurely activies.

Another example can include a husband insisting his wife provide him with every grocery receipt for his approval. If the husband doesn’t agree with any food purchases, he lectures his wife for hours. This can lead to a person not being able to choose what type of foods they want to eat.

What can I do if I’m experiencing financial abuse by my partner?

The most important thing is your safety and wellbeing. The police may either charge the violent person with assault and/or apply for an Apprehended Domestic Violence Order (ADVO) for your protection. If you prefer to remain in the house with your children, you can ask the police to remove the violent person from your house. If you need to speak to someone about advice on leaving your relationship, you can call the domestic violence hotline. The hotline can refer you to other services available for people in your situation.

If you are experiencing financial abuse, it is important to take legal action as soon as possible which may involve commencing court proceedings to prevent your financial situation worsening. This is because your assets are at a risk of being stripped or all your money being spent by your abuser. 

You can apply for an urgent application in the Federal Circuit and Family Court of Australia (FCFCA) to get an injunction to prevent your assets being moved to other accounts, spent or your mutual funds disappearing. An urgent application for an injunction will usually get your matter before the court within weeks as opposed to the three months (plus) it can take to have a non-urgent proceeding heard before the court.

It is important to keep a list of documents that can confirm the existence of financial abuse, and to ensure that collecting this evidence is done safely. For example, credit card statements that can prove that a partner has money even though that partner is refusing the victim access to purchase goods they need. Credit or other financial product/service applications made in the victim’s name without their knowledge, is good evidence to retain safely, preferably in a trusted family member or friend’s home.

This area of law can be complex, especially given the urgent nature of court applications, which is why we strongly recommend you seek advice from an experienced lawyer.

Conclusion

If you are experiencing financial abuse and are worried about your health and safety, it is important to seek help from the police who can assist in applying for an ADVO.

You should also seek advice from an experienced lawyer about ways in which you can protect your wealth and assets being jeopardised and how to collect relevant evidence that can assist in you applying for an urgent injunction if you choose to go down this path.

If you or someone you know wants more information or needs help or advice, please contact us on (08) 8155 5322 or email [email protected].