Woe is the Personal Guarantee
18/08/2008
Two parties decide to enter into a restaurant venture. The venture needs to lease premises and enter into a finance agreement for plant and equipment. Each of the shareholders and their spouses sign personal guarantees. Additionally, one partner, who operated another successful restaurant, agreed to have his other company execute a guarantee to secure the lease and finance agreements of the new venture.
It is not unusual for medium and small business owners to be asked to sign personal guarantees in relation to their finance and lease agreements. In fact, it seems to be standard procedure for landlords and finance companies to ask for such guarantees. However, directors and owners of businesses should carefully consider the potential consequences before agreeing to sign any personal guarantees.
It is all too common for business relationships to break down. When this venture stumbled, it was eventually agreed that one shareholder would stay on and run the new venture on his own, and the other shareholder would pull out of the venture. While the parties were able to agree on a price for buying out the “leaving” shareholder, things got very complicated when they could not get the finance company or the landlord to release the leaving shareholder from the guarantees.
This was made worse by the fact that the landlord would have released the leaving shareholder from the guarantee if the remaining shareholder had agreed to put up a larger bond. That shareholder refused which meant that with their guarantees still in place the leaving shareholder was still tied to the success of the business even though they were getting nothing out of it.
There is little protection given to business guarantors outside the common law. A guarantee cannot be avoided simply because the guarantor did not think carefully about the implications of the guarantee, or signed the guarantee on the say so of a spouse or child, or because no time was taken by the guarantor to think before signing the guarantee. Even if a director resigns, or a shareholder sells their shares, they will remain liable for the guarantees that they signed.
If you are asked to provide a personal guarantee, you should consider the potential implications carefully, and of course, it is always advisable to get legal advice before entering into a personal guarantee. There may be other alternatives to providing the personal guarantee, such as providing a bank guarantee, a larger bond and or a further security.
It is interesting to note the comments of a Sydney restaurateur who operates a number of small Thai Takeaway outlets and who never agrees to give personal guarantees: “We have never been refused a tenancy because we have refused to give a personal guarantee. Many less experienced retailers would be persuaded to give a personal guarantee, and this can end up being a source of many personal disasters” (Phatboys Thai Restaurants, Submission to the Productivity Commission “The market for retail tenancy leases in Australia”).
Has Lease Duty Really Been Abolished?
To the relief of many, from 1 January 2008, the government has moved to abolish stamp duty on Leases in New South Wales.
But is this a blanket abolishment of stamp duty on Leases or are there certain types of leases that will continue to attract stamp duty after 1 January 2008?
Generally after 1 January 2008 stamp duty will no longer be payable on leases. However there are a number of instances in which Leases will still attract a stamp duty liability.
The following are an example of some of a number of types of Lease transactions that will continue to attract stamp duty after 1 January 2008:
| 1. | Leases that were signed before 1 January 2008, even if the commencement date of the Lease is post 1 January 2008. | |
| 2. | Agreements to vary a Lease that were first signed before 1 January 2008. | |
| 3. | Leases which are entered into pursuant to the exercise of an option if an option fee is paid for the grant of the option. | |
| 4. | Transfers or assignments of leases. | |
| 5. | Surrenders of Leases. |
It is therefore important that before entering into a lease, consideration of any potential stamp duty implications could save you a lot of time, stress and money, especially if the stamp duty office later determines that stamp duty should have been paid on the lease transaction.
As is always the case in a business transaction, never assume! Rather, consider all issues and get advice if you need it. For help on any business issue you may be facing, please pop in to meet with us or call us on 8296 6222.