Do personal guarantees apply after lease termination and the creation of a monthly tenancy?

The issue of whether personal guarantees continue to apply following the termination of a lease and creation of a monthly tenancy was recently addressed in APlus Capital Pty Ltd v Kontomichalos [2024] VSC 546 on appeal from a decision of the Victorian Civil and Administrative Tribunal (VCAT).

Case background

• APlus Capital (APlus) were tenants of a serviced apartment complex in Kew, Melbourne. Following a disagreement over proposed bathroom works, it withheld rental payments, thereby repudiating each lease. The leases were terminated on 3 September 2018. However, APlus continued to trade and occupy the apartments, thereby creating month-to-month tenancies until January 2019.
• In an effort to recover outstanding rent and charges, the landlords initiated proceedings against APlus and its director, Ximeng Zhao, and secretary, Robert Ian Dunstan, who had acted as guarantors for guarantees contained in transfer of lease deeds (Deeds).
• In response, APlus filed a counterclaim, seeking damages and a declaration that they were entitled to withhold the rent because the landlords had not paid for the repair works.

Tribunal’s findings

On 20 September 2022, senior member Forde of the VCAT dismissed APlus' counterclaim, ordering it to pay $209,395.67 to the landlord. SM Forde held that:

• APlus had failed to establish the landlord’s obligation to pay for the proposed bathroom renovations and did not have the right to offset rent against the cost of these works
• APlus had repudiated the leases by withholding rent prior to 3 September 2018
• APlus had continued to occupy the premises pursuant to monthly tenancies “on the same terms as” the original Deeds
• APlus’ guarantors, Zhao and Dunstan, were therefore liable for the amounts payable by APlus to the landlords.

Supreme Court judgment

On appeal, APlus’ guarantors argued that their guarantees were only applicable to the original leases, not the monthly tenancies. This was swiftly rejected by Ginnane J. Upholding the Tribunal’s decision, His Honour held that:

• the terms of the leases required the tenant to pay rent and do everything required by the leases during the lease term and any period it remained in occupation after the leases ended (clause 3)
• under the guarantees, the guarantors guaranteed that the tenant would “pay the rent promptly”. This includes rent accrued after the leases ended
• a reasonable business person interpreting the guarantees would have taken into account the fact that the parties contemplated that APlus might continue in possession after the leases ended, in which case “they would be obliged to pay the rent and do everything else required by the Deeds”
• the Tribunal gave the parties a sufficient opportunity to address the issue of the guarantors' liability during the initial hearing, meaning it did not err in refusing further submissions from APlus on 29 November 2022.

Key takeaways

This case illustrates the importance of the context in which a guarantee is entered, particularly the surrounding circumstances known to both parties at the time of the transaction. The terms of a guarantee will determine whether the liability of the surety extends beyond the expiration of an agreement.

Leases commonly include clauses about continued occupation after the lease expires or is terminated.  Guarantors should be aware that such obligations are likely to be captured in well-drafted guarantee provisions.  Landlords should ensure their guarantee provisions are drafted to capture the entirety of any occupancy of the tenant.

For tenants: absent express provisions, this case reinforces that it is highly likely that a failure to pay rent will amount to a repudiation of the lease. Withholding rent carries significant risks and should only be pursued with caution, ideally with the guidance of expert legal advice and strategy.

If you have any questions regarding this article or need assistance, please contact a member of our team below.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Chris Brodrick

Alana Giles

Charlotte Conroy

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