The potential catastrophic consequences of Lessees providing personal Directors guarantees has again been highlighted in an instance where the owners of a failed fresh fruit and vegetables retail shop were ordered to pay $3.5m.
The shopping centre Lessor agreed to grant a new 10 year lease to an existing tenant with the right to be the sole independent specialty fruit and vegetable retailer.
After the new lease had commenced, an existing nearby IGA supermarket underwent a major refurbishment and began selling fresh food and vegetables which it not previously offered.
The tenant’s profits deteriorated, and they subsequently defaulted on their rental payments.
Negotiations failed to secure any sufficient rent reduction and the landlords terminated the lease. Later, Coles took over the tenant’s premises and the Franklins premises and entered into a new lease at a lower rent than the tenant had paid.
The landlord brought proceedings in the Supreme Court against the tenant and its guarantor for the recovery of rent and damages. The tenant argued that the landlord had mis-represented to the tenant that it would have exclusive rights to sell fresh fruit and vegetables in the shopping centre.
The Appeal Court endorsed the earlier judgement finding that the word “independent” meant independent of other stores, which did not involve a right of the tenant to be protected against competition from supermarkets and did not have ‘exclusivity’.
As there was no misrepresentation made, there could be no finding that it was misleading or deceptive, or indeed unconscionable for the landlord not to disclose to the tenant that they would in fact soon face new competition through a nearby supermarket refurbishment.
This case highlights several issues:
- the potentially devastating financial risk that company directors take when giving personal guarantees under a retail lease
- the need for tenants to seek appropriate legal advice so they clearly understand the implications of the lease terms
- the need for Valuers to carefully consider exclusive right provisions when undertaking market rent assessments
- the alternate options of lessee tenants offering limited guarantees or higher rental bond or bank guarantee or limiting their exposure though shorter term leases
NE2 Pty Ltd v P.T. Ltd  NSWCA 10
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