You’ve assigned the lease – how about your personal guarantees?
The treatment of personal guarantees on assignment of a lease depends on where the retail premises are based and which state’s retail leasing legislation applies. In this article, we look at what tenants need to do to ensure they are released from personal guarantees in Victoria, NSW and Queensland.
What is a guarantee?
On entering into a retail lease, it’s very common for a landlord to require additional security that the tenant (usually a company or trust) will meet its lease obligations. This particularly applies where the tenant is a new business, a company with limited assets, or has no proven financial track record.
By giving a personal guarantee, you agree to be personally liable if the tenant:
- Defaults on rent
- Fails to pay outgoings
- Breaches the lease in any other way (e.g. make-good at lease end)
This can expose your assets — including your home, savings, or income — to legal action by the landlord. Obviously, if you later assign the lease to another party, you need to ensure that you are off the hook and are released from any personal guarantees that you have given.
Taking a look at Victoria
The legislation in Victoria is helpful – section 62 of the Retail Leases Act 2003 (Vic) provides that the assigning tenant and any guarantor are released from liability if the following conditions are met:
1. Disclosure is provided
The outgoing tenant must give the incoming tenant a Disclosure Statement and copy of the lease at least 7 days before the assignment. A Disclosure Statement is a document prescribed by the legislation which outlines essential information about the lease. The statement given by the tenant on assignment will likely replicate the majority of the information provided in the landlord’s disclosure statement and also outline any matters which may have a material impact on the business going forward, as well as any notices issued by the landlord.
If the Disclosure Statement isn’t given properly, the outgoing tenant and guarantors may remain liable, unless the incoming tenant waives the requirement in writing. It’s really important to make sure that all relevant information is included.
2. Landlord consents to the assignment
This is usually required under the lease and must not be unreasonably withheld (per section 60).
3. The assignment is valid and effective
If these conditions are met, the outgoing tenant and any guarantors are released from all liabilities that arise after the assignment.
Release of guarantees in NSW
In New South Wales, the Retail Leases Act 1994 (NSW) does not contain an automatic release provision for tenants or guarantors when a lease is assigned, unlike Victoria’s section 62. As a result, in NSW, a tenant or guarantor will only be released from personal guarantee obligations if the lease expressly provides for a release, or this is negotiated with the landlord.
A formal deed of assignment and release should be entered into, which expressly releases the outgoing tenant and guarantor. Without this, both of those parties may remain liable for defaults under the lease, even after assignment.
The position in Queensland
In Queensland, a tenant or guarantor may be released from a personal guarantee on assignment of a retail lease but only if strict statutory conditions are met. These are set out under section 50A of the Retail Shop Leases Act 1994 (Qld) as follows:
- Proper Disclosure is Given
The outgoing tenant must give the incoming tenant a Disclosure Statement and a copy of the current lease at least 7 days before either:
- Where the assignment is part of the sale of a business, the date on which the assignee enters into the agreement for sale; or
- The date on which the landlord is asked to consent to the assignment.
The statement must be complete and not false or misleading in any way. The outgoing tenant also must give the Landlord a copy of the disclosure statement that it gave to the incoming tenant.
- The Landlord Consents to the Assignment – Consent must be obtained where required by the lease.
- The Assignment is Lawful and Effective
If these requirements are met, the outgoing tenant and their guarantors are released by operation of law from obligations that arise after the assignment date (but remain liable for any earlier breaches).
General Tips for Tenants and Guarantors
- Document everything – provide disclosure and consent in writing, and keep evidence.
- Never assume a guarantee ends automatically – it must be released by law or contract.
- Carefully review the guarantee’s wording – some extend beyond the initial term to renewals or holding over.
Here at Flint, we can help you ensure that you are released from guarantees when you need to be. Contact us to find out more.
Disclaimer
The information on our website is general and is not legal advice. We put lots of work into making our content is insightful but it may not apply to your personal circumstances. We’re more than happy to help with your individual issues – just reach out.