Nov 5, 2020 | Property Law
If you are a director of a company entering a commercial or retail lease, a landlord will likely require you to give a personal guarantee for the company’s obligations under the lease. In such cases, directors should fully comprehend the extent of the guarantee they are providing and obtain appropriate legal advice to minimise financial exposure.
There are two court cases that are dire reminders of the risk that a director takes when guaranteeing the performance of a company’s obligations.
In Lin v Solomon [2017] NSWCA 328 the landlords were entitled to recover personally from the guarantor, after the lessee company defaulted under the lease. The landlords, who owned the CircaRetail Shopping Centre at Bella Vista, were awarded damages comprising unpaid rent, outgoings, contributions to the retail centre’s promotional levy and GST.
The guarantor claimed that he was ‘induced to enter into the guarantee of the lease by misleading and deceptive representations’ made by the leasing agent. The alleged misrepresentations were that the leased premises, comprising a newsagency, would soon attract increased foot traffic due to the predicted employment of some 1,500 people at a nearby site.
The Court found the misrepresentations as pleaded were not established and, in any event, there would have been no reliance on such representations as the guarantor was an experienced newsagent. In fact, apart from paying a deposit and providing a bank guarantee, the lessee company failed to make any lease payments or outgoings under the five-year lease which commenced in May 2009 and was terminated by re-entry by the lessors in December 2012.
The primary decision was upheld on appeal and the guarantor was ordered to pay the respondents the sum of $602,178.35 plus interest and costs
Incidental to the issue of the misrepresentation, but significant to the appeal, was the appellant’s allegations that the primary judge had not been impartial and should be recused from the case. The appellant was also unsuccessful on this point.
In NB2 Pty Ltd v P.T. Ltd [2018] NSWCA 10 the lessee / appellant challenged the primary judge’s decision to award payment of damages to the landlord / respondent after the lessee company breached the lease.
The lessee had entered a ten-year lease for a fruit and vegetable shop at Westfield Shopping Centre, Miranda. After defaulting in paying rent, the lease was terminated by the landlord which then sued the lessee company and the guarantors under the lease.
In the primary hearing, the appellant claimed that it had been misled by the landlord during negotiations after expiry of its previous lease, when it promised the lessee exclusivity as the ‘sole independent speciality fruit and vegetable retailer’ within a defined area at the centre. Subsequently, nearby Franklins re-opened its refurbished premises selling fresh fruit and vegetables, which detrimentally affected the lessee’s turnover.
The alleged misrepresentations were not made out. The Court considered that the expression ‘sole independent fruit and vegetable retailer’ did not constitute retailers such as Franklins as it was not a ‘specialty retailer’.
The primary judge entered judgment in favour of the landlords for $3,537,040.50 against the two directors of the lessee company. This was upheld on appeal and the appellants were ordered to pay the respondent’s costs.
Joint and several liability
As many companies have more than one director, both or all directors are usually required to guarantee the company’s performance of a contract with a third party. In such cases, it is important to understand that the third party will be able to call upon either one or all of the joint guarantors for the outstanding liabilities of the company.
The third party need not exhaust all options to recover the debt against the company and will usually pursue the director/s in the most favourable financial position.
Directors who give guarantees should seek legal advice regarding appropriate asset management to safeguard personal assets.
Conclusion
A guarantor is at considerable risk of personal exposure if the company is unable to meet its responsibilities under a contract, and in such cases may face financial disaster.
Personal guarantees for lessee companies can seldom be avoided. However, the risk for guarantors may be minimised by paying a higher bond or arranging a bank guarantee in exchange for limiting the guarantor’s financial exposure.
Companies and their directors are advised to obtain legal assistance before entering a leasing arrangement and independent advice regarding the extent of their personal obligations under a guarantee arrangement.
It’s easy to let the prospect of a new venture curtail a comprehensive review of the terms of a lease, however these cases provide thoughtful insight into the importance of treading carefully when it comes to guarantees.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or via our contact form here.
Nov 4, 2020 | Property Law
The usual procedure in contracts for sale of land
The usual procedure on the exchange of Contracts for a property, the Purchaser gives to the Vendor’s agent the cheque for the deposit. The deposit is consideration given by the Purchaser to the Vendor and it is what makes the contract valid. The amount can vary, but is usually 10% of the purchase price. This is usually held in the trust account of the Vendor’s selling agent, or in some cases by the Vendor’s solicitor. On settlement, the Purchaser’s Solicitor sends an order to the selling agent (via the Vendor’s solicitor) to authorising the release of the deposit to the vendor. The selling agents will deduct their commission from the deposit and the balance is released to the vendor.
Release of Deposit Clauses
A release of deposit clause is sometimes requested before the contracts exchange. This clause allows for the Vendor to have access to the deposit funds before completion. This is usually requested because the Vendor wants access to the funds to use in their own property purchase. The funds can be used to either pay for stamp duty or to pay for the deposit on a property the Vendor is purchasing. The funds may also be requested if the Vendor needs it released simultaneously with settlement because the mortgage balance on discharge is higher than the balance payable on settlement. On some occasions, the estate agent will ask the Vendor to request it, so they are able to get their commission quickly.
The release of deposit clauses are heavily cautioned by the Law Society. The reason why the release of deposit clause is discouraged is because it can become difficult to recover if the Contract falls over because of the actions of the Vendor. The recovery can have significant legal costs involved. Some of the situations which can occur where it may be difficult to recover the deposit are if the Vendor dies, or they go bankrupt, or an order affecting the Vendor due to a Family Court order.
It is important to seek the advice of a solicitor about these issues if you are going to purchase a property. If you would like more information on how we can assist you with your matter, do not hesitate to contact us on 9963 9800 or at law@etheringtons.com.au.
Nov 2, 2020 | Property Law
Avoiding the Hidden Costs of Buying a House
Buying a property in Sydney is expensive enough as it is. Don’t leave yourself open to the hidden costs of buying a house. Here are 5 issues you should consider before purchasing a property, to avoid unexpected costs.
1. Capital Gains Tax
If you are purchasing an investment property, you should always be mindful of being liable for Capital Gains Tax (CGT). CGT applies when you sell your property, if you’ve rented it out.
If you rent out a property for a few years to help with the mortgage and then decide to move into the property, you should only be liable for CGT for the time the property was rented out. There is a CGT discount method, which means that by living in a property for 12 months, you can reduce your capital gains liability by 50%.
2. Stamp Duty
Stamp duty is a levy charged on the transfer of land in New South Wales. It needs to be paid before the completion of the contract can occur. The amount is based on the purchase price of the property, and payable within three months of the contract date (the date of exchange). There is an exception for off-the-plan properties, whereby it can be delayed by twelve months.
Stamp duty can be a large sum and it is important that you factor in this amount when purchasing a property.
3. Organising Your Finance
Once you have exchanged contracts (both you and the seller have signed) you will be bound to complete the contract on or before settlement. A trap that home buyers occasionally fall into, is not having their finances prepared. You should liaise with your broker or receive some form of pre-approval from your financier before you purchase a property.
If the preparation of the financial approval and the signing of the loan documents is left to the last minute, it can delay settlement. If you delay settlement you will become liable to penalty interest on the balance of the purchase price.
The seller may also be able to rescind the contract, meaning you will lose the property and your deposit. It is therefore vital that you ask your solicitor to liaise with their broker or financier to ensure that the finance will be ready in time for settlement.
4. Pest & Building Report
An informed purchaser is a good purchaser, which is why it is important to obtain a pest & building report from a reputable company. A pest & building report will show the ‘real’ property you are buying.
The report lists the issues and damage that is found on the property and the cost in repairing it. This is important for a purchaser as it will show the additional cost behind the purchase of the property, as it may detail pipes and cracked tiles that will need to be repaired, and if there are any leakages or dampness around the property. It will also show if there is any evidence of termite or other insect damage to the property.
For example, a woman in Victoria recently purchased a property without obtaining a pest & building report. Her house sat on top of a double garage. The woman had never entered the garage until she had purchased the property. As soon as she walked inside the garage, she thought her house was falling down. The back wall was so concave, the woman could put her hand in the cracks. The costs of fixing this was up to $50,000.
If she had obtained a pest & building report, she would have established the position with the back wall. As a result she may not have purchased the property.
5. Survey Report
A survey report is useful for houses or vacant land. It shows the boundary of the property, so you know if the neighbours fencing or structures encroach onto your property or vice versa. This can also be useful for a purchaser that will be building a structure on the property and will require council approval, as this is one of the important documents the council will need.
Consulting a Solicitor
These are some of the issues that can befall home buyers. It is important that a prospective purchaser speak to a solicitor who knows the process and can help the purchaser navigate these issues. To discuss your property matter, please contact Etheringtons Solicitors on 9963 9800 or via our contact form.
Nov 2, 2020 | Property Law
Strata title is a more recent phenomenon, with legislation made in 1961 setting out strata title. Strata title now covers nearly all apartment blocks and unit properties. Prior to 1961, there was no strata title, and all these types of property were covered by company title. This is less common today and most units have converted to strata title (though it still exists in certain places). Prospective purchasers often have an aversion to company title properties and steer clear of them, due to things they hear through the grapevine. In reality, it is just another form of property title, alongside the widespread torrens title and strata title properties, although it has unique features.
What is Company Title?
Company title emerges when a company owns a unit complex. The ownership of the individual units in the complex is granted by the purchase of shares in the company that owns the complex. An example would be a company that owns a unit complex that has four individual apartments. There are forty shares in the company and each owner purchases ten shares. Each owner purchasing ten shares is entitled to the use and enjoyment (but not ownership) of an apartment in the complex. It is important to re-emphasise here that the owner of the unit does not enjoy title that he/she would normally enjoy if it was a strata unit. Instead, they own a portion of the shares in the company and this allows them to use the property. The company itself has the title.
Advantages
- An advantage of company title is that it is valued less than an equivalent strata unit. This is because there is reduced administration fees and the nature of the title brings the value of the property down.
- There may be long term advantages with company title property, as it may be converted into strata title and increase the value of the property.
- The possible restrictions on the use of the property may suit some purchasers. For example in some company title properties, onerous rules could be imposed on shareholders to regulate security of the building matters.
Disadvantages
- A disadvantage of company title is the possible restrictions on the use of the unit or apartment being purchased. As a company owns the complex, it is governed by a constitution or articles of association. This is unlike strata title, which is governed by legislation and by-laws. This means that it can be more restrictive and can limit what a potential purchaser can do. For example, they can restrict people leasing out the unit, or they can have a mortgage over the shares. It is important for a prospective purchaser to review a company title constitution with a solicitor, so they are aware of what these restrictions will be.
- Another disadvantage is the approval process that may be required to purchase the shares of the company. When purchasing a unit in company title, it is subjected to the approval of the Board of Directors. This means that while a prospective purchaser may have all the capital required to purchase a unit, it does not mean they will be able to purchase it. The approval process from the Board of Directors changes from company to company, and it is crucial for a purchaser to discuss this process with their solicitor, who will be able to advise the prospective purchaser of the requirements.
As seen above, people should not be turned off by a company title property. It is simply another form of property title with its own unique features. A potential purchaser should discuss with a solicitor whether this type of property is right for them. If you would like more information on how we can assist you with your matter, do not hesitate to contact us on 9963 9800 or via our contact page.
Nov 1, 2020 | Property Law
Security for Leases – what is a Security?
Landlords ask for security for leases, which you’ll have to pay when entering a lease. The security is an amount – usually 4 or more weeks’ rent – to cover any extra expenses should you break the terms of the lease agreement. For example, if the property is unreasonably dirty when you leave, cleaning may be paid for with the security. If you haven’t breached the lease agreement, your landlord will return the security amount to you at the end of the lease.
There are a few options that you can consider to provide a security. Your landlord might only accept certain types of security based on the type of lease and the amount. Check with them when making your decision.
The three most common forms of security are:
Security Deposit
A security deposit, or cash bond, is an amount that is paid directly. It is paid to your landlord or managing agent when you enter into a lease.
If your lease is a commercial lease, you can pay the security directly to your landlord or managing agent. They will hold it for the term of the lease. The exception is if your lease is a retail lease (a type of commercial lease used if you have a shop front). If your lease is a retail lease, your security must be provided to the NSW Retail Bond Scheme. They will hold it during the term of the lease. Your landlord will require your signature to claim the security held, should you break the terms of the lease.
Bank Guarantee
A Bank Guarantee is an unconditional undertaking provided by a bank to your landlord to guarantee payment of an amount if required. In effect, the bank will pay the security amount to the landlord on your behalf if you either break the terms of the lease or have outstanding rent due.
The bank will usually secure this amount by:
- Cash deposit by yourself (if you are an existing customer); or
- Drawing on an existing security (such as the equity in a mortgage).
This can make it attractive to some tenants, as it doesn’t tie up cash in a security deposit.
Third Party Guarantee
A third party can guarantee payment under a lease. Your landlord would be able to recover any monies due to a breach of the lease from the third party. If the tenant is your company, the landlord may require the directors to guarantee the lease. If you are an individual tenant, a third party guarantee might not be accepted by your landlord as a form of security, as it can be costly to enforce payment if required.
Seek Legal Advice
It is important to seek legal advice before entering into a lease to determine which type of security is in your best interests. Therefore please get in touch if you have any questions about security for leases, or other property law matters.
Oct 31, 2020 | Business Law, Property Law
Below are five things you need to check before signing a business lease.
1. Factor in rent payments
As a tenant, you are required to pay an amount – often referred to as your rent – for occupying the premises. This amount is usually paid to your landlord or managing agent each month. Calculate how this will affect your business so that you will be able to operate effectively whilst paying the rental amount. Look out for clauses in your lease that set out the yearly increase in the amount of rent payable, as well as the utilities you are required to pay for.
2. Obtain council approval
It is important to check if you require Council Approval to operate your business before entering into a lease. All properties in Sydney are zoned by the local council. The type of activities and zones will vary from council to council, and determine what sort of activities the property can be used for. Examples include:
- Residential zones;
- Commercial zones; and
- Industrial zones.
If you are entering into a lease, you need to ensure that your business is allowed to operate at that location. If you operate without council approval the council can stop your business from trading or order you to close your business.
3. Organise a security
When entering into a lease, the landlord will usually require you to provide security for the lease. The amount of security is usually the equivalent to four or more weeks’ rent.
The type of security you could provide are:
- Bank Guarantees;
- Bank cheque;
- Deposit bond; or
- A guarantee by a third party.
It is important to ensure that you seek legal advice on the type and amount of security you provide, as you will be forfeit this amount if you break the terms of the lease. Read our article Three Most Common Forms of Security for Leases for a detailed explanation of securities.
4. Note the condition of the property
Most leases have a ‘make good’ clause, which requires you to return the premises to its original condition when the lease ends. You therefore need to ensure that you keep evidence of the condition of the property when you entered into a lease. If this is not done, the landlord can use the security provided you provided to ‘make good’.
This is a common area of dispute between landlords and tenants. It is therefore important to know your make good obligations.
5. Seek a legal opinion on the terms of the lease
The lease is prepared by your landlord and will therefore be drafted in their favour. Hence it is crucial that you seek a solicitor’s advice on the terms of the lease. They can also assist with negotiations. This can bring a balance of power to the relationship between you and your landlord, and will ensure that you know what you are signing. Leases can have three or five year terms and are difficult to terminate before their expiry, so it is important to know your obligations and if there are any unfavourable terms.
Conclusion
These are some of the issues that may arise when signing a business lease. Therefore it is important to seek legal advice if you are considering entering into a business lease. Please get in touch to discuss your lease.
