Two retail tenancy failures expose directors who gave their personal guarantees to the landlord to ruinous losses

Two NSW Court of Appeal decisions in two months have upheld orders made against directors of a corporate tenant to pay $3,537,040.50 in one case, and $602,178.35 in the other, as damages for the landlord’s loss of rent and make good expenses, as a result of failed retail tenancies.

The decisions are:

NE2 Pty Ltd v P.T. Ltd [2018] NSWCA 10 (judgment by Macfarlan JA, Meagher JA and Gleeson JA agreeing) in which the tenant’s directors had guaranteed the tenant’s obligations under a lease for a fresh fruit and vegetable shop (“Panetta Fruits / Panetta Mercato”) in the Westfield Centre at Miranda. Their defence to the landlords’ claim for recovery of rent and damages was based on a breach of the alleged representation that they would be ‘the only fresh fruit and vegetable retailer in the Fresh Food Precinct of the Shopping Centre’. It was unsuccessful.

Lin v Solomon [2017] NSWCA 328 (judgment by Payne JA, Meagher JA and White JA agreeing) in which the tenant’s director had guaranteed the tenant’s obligations under a lease for Circa Newsagency in the CircaRetail shopping centre at Bella Vista. His defence to the landlord’s claim for recovery of rent and damages was based on breach of the alleged representations that the centre would have significant customer traffic and be busier than Norwest Marketplace. It was unsuccessful.

These decisions illustrate the potentially ruinous financial risk that company directors take when giving personal guarantees under a retail lease.

NE2 Pty Ltd v P.T. Ltd – Tenancy: Panetta Fruits at Westfield Miranda

Background: In early 2009, the tenant’s lease was coming to an end. At the same time, the business of a competitor “In Season” failed, and the tenant acquired its lease. In doing so, it became the only retailer of fresh fruit and vegetables (FFV) in the Fresh Food Precinct of the Westfield Centre. It asked the landlords to grant a new 10 year lease to consolidate its business into one shop and exclusivity to maintain its new monopoly in FFV.

The Negotiations / Representations: From late March until October, the directors of the tenant had four significant conversations, and exchanged emails, in which the subject of exclusivity was discussed. The landlords’ offer included exclusivity if the tenant agreed to an annual rental of $888,500 plus GST, as opposed to an annual rental of $788,500 plus GST if there was none. The landlords commented that at those rents the occupancy cost would be “good” - 8-9% if $13 million in sales was achieved.

The higher rent was agreed and the landlords agreed to grant exclusivity in these terms: The Lessor agrees to grant the Lessee the right to be the sole independent specialty fruit and vegetable retailer in the Fresh Food Market located on Level 3 from Shop 2076 to Shop 2090 of Westfield Miranda as per the attached plan.

How did the dispute arise?: The new lease was executed on 7 May 2010. On 19 April 2010, Franklins received landlords’ consent to refurbish its existing supermarket in the Fresh Food Precinct. It was closed for refurbishment from September/October 2010 and reopened in March 2011 offering fresh food and vegetables (which it not previously offered). As a direct result, the tenant’s trade and turnover diminished and it had trouble paying the rent. It defaulted in May 2012. Negotiations with the landlords failed to secure any sufficient rent reduction and the landlords terminated the lease on 31 July 2014. In 2015, Coles Ltd took over the tenant’s premises and the Franklins premises and entered into a new lease which commenced on 11 November 2015, at a lower rent than the tenant had paid.

The Court’s findings: The landlords promised to the tenant that it would be the “sole independent fruit and vegetable” retailer, which expression did not apply to supermarkets such as Franklins which were not specialty retailers. The landlords had no obligation to disclose their knowledge that Franklins proposed to offer retail fresh food and vegetables in the future.

Court Orders: The landlords were entitled to recover arrears of rent up to termination of the lease of $1,858,397.50; rent until the Coles lease commenced of $1,751,198.53; and the cost of removal of the tenant’s fittings and fixtures of $64,959.50; against the two directors who had signed personal guarantees.

Lin v Solomon – Tenancy: Circa Newsagency at CircaRetail Bella Vista

Background: In May 2009, the tenant entered into a 5 year lease of premises at the CircaRetail shopping centre, Bella Vista, as a newsagency. It was a newly built shopping centre.

The Negotiations / Representations: During the course of the lease negotiations, the tenant alleged that the landlord had represented that a nearby building called “The Works” would employ 1,500 people and would bring significant consumer traffic; that the centre would be busier than Norwest Marketplace; and would soon be regularly “filled up” with customers.

How did the dispute arise?: The tenant had made no payments of rent and no payments of any other kind except the deposit and a recovery under a bank guarantee.

The Court’s findings: In addition to finding that the alleged representations were not made as alleged, the Court found that there was no reliance upon the representations because: the director was an experienced businessperson and newsagent, who conducted a newsagency located a 5-minute drive away from the proposed new shopping centre; he knew the area well and he knew that there was a large workforce in the Norwest area; he also proposed a floor plan to the landlord which was the same as in the lease.

Court Orders: The landlord was entitled to recover $602,178.35 inclusive of $19,437.95 plus GST for changing the locks, to make good the premises and for a new hoarding.

Conclusions

In their eagerness to enter into a lease, many businesspeople are prepared to give an unlimited director’s guarantee in return for a lesser rental bond or bank guarantee, the aim being to preserve their working capital.

The company directors in these two cases gave unlimited personal guarantees, exposing themselves to potentially ruinous losses.

With the benefit of 20/20 hindsight, offering a higher rental bond or bank guarantee in exchange for a limited personal guarantee might have been a better option. Alternatively, a shorter initial lease term (with options to renew) would limit their exposure, although it would expose the tenant to rent reviews to market on exercise of the options (as opposed to fixed rent reviews).
 

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