Guarantee of leases

It is sometimes difficult to ensure that a guarantee of a lease that is intended to be registered covers liabilities under the lease if it is not registered.

In the leading case of Chan v Cresdon Pty Ltd (1989) 168 CLR 242; [1989] HCA 63 the High Court of Australia considered the effect of failure to register a lease upon a guarantee.  In that case, the guarantee covered obligations “under this lease”.  The High Court held that the words “this lease” referred to a registered legal lease, not an unregistered equitable lease, so the Guarantor was not liable. 

In response to this decision and a similar finding in Barecall Pty Ltd v Hoban [2009] NSWSC 1104, REIWA revised its standard form lease.  The new form of lease includes the following guarantee and indemnity clauses:

24.1 Guarantee

The Guarantor guarantees unconditionally and irrevocably to the Lessor the due and punctual payment by the Lessee to the Lessor of all Money and the due observance and performance of the Lessee’s Covenants.

24.2 Indemnity

As a separate undertaking, the Guarantor:

    (a) Indemnifies unconditionally and irrevocably the Lessor against all loss, liability, cost or expense (collectively “the Lessor’s loss”) incurred or suffered by the Lessor arising from or in connection with any event of default or as a consequence of a disclaimer of this Lease by a liquidator or trustee of the Lessee; and

    (b) As principal debtor agrees to pay to the Lessor on demand a sum equal to the amount of the Lessor’s loss.

The term “Money” was defined in broad terms as:

The Rent[,] and any other money payable by the Lessee under this Lease[,] including without limitation money payable during any period of holding over or while the Lessee occupies or is entitled to occupy the Premises under any other legal or equitable right or tenancy or as a trespasser and includes any part of it (emphasis added).

The word “including” in this definition presents a minor problem because a legal obligation under a registered lease does not “include” an equitable lease.  However, the only sensible approach to this definition is to insert commas where indicated above to break up the sentences: Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168 at [114].

Clause 24.3 relevantly provides:

The guarantee and indemnity contained in the clause 24:

Continues in full force and effect during the Term and while the Lessee occupies or is entitled to occupy the Premises under this Lease or any form of tenancy or right of occupation or as a trespasser or other unauthorised occupier or holds an equitable interest in the Premises under an agreement for lease or as a periodical tenant or is holding over under this Lease (emphasis added).

The italicised words in clause 24.3 are clearly different from the guarantee clauses considered in Chan v Cresdon Pty Ltd (1989) 168 CLR 242 and Barecall Pty Ltd v Hoban [2009] NSWSC 1104.

The first limb of the guarantee, clause 24.1 clearly applies to the obligations of the Lessee under an unregistered (equitable) lease because of the broad definition of Money and the terms of clause 24.3.

However in Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168, Edelman J held that the second limb of the guarantee, clause 24.2, does not apply to unregistered leases.  There was no justification for reading clause 24.2 as extending to obligations which, at best, arise under an equitable lease, still less the other types of informal tenancy or unauthorised occupation contemplated by clause 24.3 of the guarantee.

Edelman J held that the failure to register the lease did not excuse the Guarantors from their obligation to make good the Lessee’s failure to make the due and punctual payment to the Lessor of all Money covered by the lease.  This obligation arose from clauses 24.1 and 24.3 of the guarantee and indemnity provisions in the lease.  However, his Honour suggested that the failure to register the lease would prevent the Guarantor being held liable for the Lessee’s breach of covenants under the lease.

In the result, the Guarantor was held liable for certain monetary amounts payable by the Lessee, such as arrears of rental and outgoings, but not for amounts claimed as damages in relation to lost rent after termination of the lease, land tax, council rates, water rates, water consumption, insurance and repairs and maintenance to the garden.  There were several reasons why these amounts were not recoverable from the Guarantor (see [2012] WASC 168 at [133]-[144]), but one possible reason was that the guarantee did not extend to these obligations in the lease because it was not a registered legal lease.

Lavan Legal comment

Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168 is yet another reminder that ambiguities in guarantees are construed in favour of the guarantor and the guarantor will only be held liable according to the strict terms of their guarantee.  If lessors wish to hold guarantors liable for damages for the lessee’s breaches of covenant in an unregistered lease or informal tenancy arrangement, then they will need to amend clause 24.1 of REIWA’s standard form guarantee to make it clear that it extends to the payment of damages for breaches or non-performance of the lessee’s covenants under an unregistered (equitable lease) or informal tenancy.

It would also be necessary to insert a broad definition of “damages” in terms that are not restricted to “this lease” but extend to damages for breaches and non-performance of covenants in an unregistered equitable lease or informal tenancy or holding over.

For more information about guarantees of leases, please contact:

Peter BeekinkDr James O'Donovan
PartnerSpecial Counsel
(08) 9288 6751(08) 9288 6804