Risk of directors giving unlimited personal guarantees when entering retail leases

The NSW Court of Appeal has upheld orders made against a tenant to pay damages amounting to $3,537,040.50 as compensation for a landlord’s loss of rent due to a failed retail tenancy. The case of NE2 Pty Ltd v P.T. Ltd [2018] NSWCA 10 involved a tenant (Panetta Fruits) whose Directors had personally guaranteed their obligations under a Fruit & Vegetable Shop Lease in Miranda Westfield Shopping Centre. The landlord brought a claim against the tenant for recovery of rent and damages, after the lease had been terminated by the landlord due to the failure of the tenant to pay rent. The tenant argued in defence that the landlord had breached the representation and term of the lease that Panetta Fruits would be the only fresh fruit and vegetable retailer in the Fresh Food  section of the shopping centre¸ due to the fact that Franklin’s Supermarket, another tenant, had begun to offer fresh fruit and vegetables.

The court found that the landlord’s promise to the tenant that it would be the only “independent fruit and vegetable retailer” did not apply to supermarkets like Franklin’s, as they did not constitute specialty fruit and vegetable stores. The Court held that the landlord was entitled to the arrears of rent up until the termination of the lease and the rent owed until the conclusion of the lease, against the Directors who has signed personal guarantees. This case demonstrates the risks involved with those giving unlimited director’s guarantees in exchange for a smaller rental bond or bank guarantee, as it increases exposure to disastrous losses.

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