KEY POINTS:
Each week, national law firm Simpson Grierson answers commercial property questions which can be emailed and headed "prime asset question". This week's question is answered by senior associate Daniel Kelleher and associate Raj Patel who can be contacted at daniel.kelleher@simpsongrierson.com and raj.patel@simpsongrierson.com.
The information contained in Prime Assets is intended to provide general information in summary form current at the time of printing. The contents do not constitute legal advice and should not be relied on as such. Specialist advice should be sought in particular matters.
Q. A couple of years ago I took a lease of a premises from which I opened up a retail store which sold low-cost consumer goods. The premises are located within a commercial shopping centre. At the time of negotiating my lease, I signed an agreement which contained a form of deed of lease attached. In order for me to secure the premises, the landlord required a guarantor for the lease. I agreed to provide a personal guarantee of the lease. Although I signed an agreement to lease, no lease documentation was ever signed. I have been in occupation of the premises for two years with a further three years of the lease to run. With the demand for low-cost consumer goods decreasing and increasing overheads and operating expenses, it does not seem possible for me to continue to lease the premises. Am I bound by the unsigned lease and what are my obligations as guarantor under the lease?
A. Without having reviewed the agreement to lease and attached lease, we assume that it was in a fairly standard form and would have contained a provision similar to the following: "The guarantor acknowledges and guarantees to the lessor the due and punctual payment of rent and the performance by the lessee of all covenants, conditions, agreements, declarations and provisions to be observed by the lessee under the lease" and that the "Guarantor agrees that as between the guarantor and the lessor the guarantor may for all purposes be treated as lessee and the lessor shall be under no obligation to take proceedings against the lessee before taking proceedings against the Guarantor".
Such provisions are not uncommon in leasing situations and the second provision allows the landlord (lessor) to take action against the guarantor in situations where it would not be economically feasible to seek relief against the tenant. This is common as in most commercial contexts the tenant will be a limited liability company.
The fact that the lease has not been executed is likely to be irrelevant. You have paid rent for some time and have entered and taken possession of the premises which provides evidence that you have been complying with the unsigned lease document.
In such circumstances the tenant is said to have an equitable interest in the land. This is especially evident in situations where the landlord has granted an unregistered lease for a term of three years or more. Such an interest can obviously be used either in your favour, as in, situations where the landlord tries to declare that no lease exists, or to your detriment, as in the current situation whereby you try to establish that no lease exists.
In situations like yours it is not uncommon for the shareholders and/or director of a small retail business to personally act as a guarantor despite the financial consequences. In such situations where the tenant is not financially secure and unable to fulfil its obligations under the lease, the guarantor will be called on to remedy the default of the tenant.
In order to avoid personal liability as guarantor the best method of terminating the lease would be to seek a surrender of the lease. A surrender of the lease may require some form of consideration on the part of the tenant as well as the landlord's consent. Other options would be to have the lease assigned to a third party which would again require the landlord's consent although the Property Law Act 2007 provides a comprehensive code on when the landlord may withhold its consent to an assignment. It should be remembered that although the lease is assigned, you will still remain liable under the lease should the assignee not be in a position to fulfil its obligations under the lease.
