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The risk involved with guarantees contained in unregistered leases

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.

2/08/2018

By Law Central Legal

Edited

A lease is a legally binding contract between the landowner and the tenant. It sets out the contractual rights of the landlord and the tenant in relation to the lease over the property.

Lease documents will usually contain certain common terms such as the term of lease; rent and outgoings payable; tenant obligations; and landlord obligations. Most leases in which the tenant is a company contain guarantees by the directors of the tenant company.   

Guarantees assert that a third party (the guarantor) must pay any costs that are not paid by the original tenant. This means if the tenant fails to meet any of their obligations under the lease, particularly financial obligations, the guarantor will then become liable to the landlord for those obligations.

A guarantee will provide security for the landlord where it is possible that the tenant may default on payments. Landlords should be aware that not all guarantees will be held enforceable by the Courts. There are several factors which will affect the enforceability of a guarantee. Firstly, guarantees contained in a lease may be unenforceable in cases where the lease is not registered in accordance with the relevant state legislation. Secondly, the wording of the guarantee is important. A guarantee which does not precisely define the scope of the guarantee can result in that guarantee being held unenforceable by the Courts.  

Unregistered Leases

Each state and territory has different legislation which governs the registration of leases. In most States, once the lease exceeds a certain period then it is required to be registered. The period in Queensland, New South Wales, Victoria and Western Australia is three years. In South Australia the period is one year. Generally, if the lease exceeds the period for the relevant state and it is not registered, then legislation specifies that the lease agreement will not be effectual to pass any interest in the land. According to the Victorian Supreme Court of Appeal, if the lease is short enough to not require registration, then it will be an effectual legal lease without registration (Cooma Clothing Pty Ltd v Create Invest Develop Pty Ltd [2013] VSCA 106).    

The practice and specific process of registering a lease is different in each state. Registration of a lease is done through the relevant land registration office for that state. Registration usually requires the relevant lease registration forms to be completed; these forms will then have to be lodged with the land registration office. Once the lease has been registered, the lease will be listed on the Certificate of Title for the property and will be visible to anyone doing a title search on the property.

When the lease is long enough to require registration but it has not been registered, it will not be effectual as a legal lease. However, the Court realises it would be inequitable to conduct legal proceedings on the basis that there was no lease agreement between the parties. To prevent this, equity will recognise a lease agreement between the parties.

It is for this reason that a landlord may not be able to fully enforce a guarantee in the terms contained in an unregistered lease. The difficulties associated with enforcing guarantees contained in unregistered leases were considered in the landmark case of Chan v Cresdon Pty Ltd (1989) 168 CLR 242.

In Chan, the respondent sought to enforce a guarantee contained in an unregistered lease of land in Queensland against the appellants. The appellants guaranteed the due and punctual performance of ‘the obligations… under this lease’. The High Court held that the words ‘this lease’, referred only to a registered legal lease. However, the tenant and the landlord had an unregistered and therefore equitable lease. The High Court held that the term which guaranteed the payment was a term of the legal lease and would not extend to be included into an unregistered equitable lease. As such, the guarantee was not enforceable and the landlord was unable to recover on the basis of that guarantee.        

Chan was followed in Barecall Pty Ltd v Hoban [2009] NSWSC 1104 where the New South Wales Supreme Court construed the words in an unregistered lease ‘the within lease’ and ‘under this lease’ to be in reference to a registered legal lease. Since the guarantee was only applicable to a registered legal lease, it was once again not applicable to the unregistered equitable lease between the parties. As such, in this case the guarantees were also not enforceable.

These cases should be seen as a warning to those who have unregistered leases and in the future may wish to rely upon the guarantee provision in their lease agreement.

Wording of Guarantees

As stated by the High Court in Chan, ambiguous wording in a lease guarantee will be interpreted in favour of the guarantor. In these cases, the word ‘lease’ has been interpreted to only refer to a registered legal lease and not an unregistered equitable lease. Although a lease should still be registered, a more specifically worded guarantee may be held applicable to an unregistered equitable lease. This can provide an additional level of protection to a land owner.

The key issue in these cases was the interpretation by the Court of the word ‘lease’ as only referring to registered legal leases. However, this is only the interpretation which has been given by the Court in the face of ambiguous meaning. A guarantee which specifically includes a reference to an equitable interest or right, can lead the Court to interpret an unregistered equitable lease as within the scope of the guarantee.

Gold/Platinum members read on for a discussion of case law where the lease guarantee specifically references equitable interests or rights

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Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.

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