Commercial Lease Case Study: Guarantor’s liability for deregistered company lessee

Key Takeaway 

The case of Crawford v Demertjis & Ruhs Pty Ltd[1] underscores the significant risk assumed by individuals who sign as guarantors to a lease. By doing so, guarantors accept the potential for personal liability. This liability can persist even if the lessee company is deregistered and as a result did not incur the liability. Under an indemnity clause that covers the company’s obligations, the guarantor may still be held accountable.

Facts of the Case

Demertjis & Ruhs Pty Ltd (Lessor) and Industrial Equipment Sales Pty Ltd (Lessee) entered a commercial lease for a term of 3 years commencing on 1 March 2010 and terminating on 28 February 2013. Mr Crawford was the guarantor under the commercial lease (Guarantor).

On 11 July 2010, the Lessee was deregistered and in accordance with sections 601AD(1) and 601AD(2) of the Corporation Act 2001 (Cth) the entity ceased to exist and the property was vested in the Australian Securities and Investments Commissions (ASIC).

The parties to the lease did not notify one another about the deregistration of the entity. The Lessee continued to pay rent to 15 June 2018 and by 15 January 2022, the Lessor regained possession of the premises and demanded payment of outstanding rent in the sum of $57,040.00.

Terms of the Lease

It is important to understand that the commercial lease included the following terms:

• Holding over provision – “unless a party gave written notice of termination of the lease, it would continue as a periodic lease from month to month at the same rent or at a rent agreed by the parties.”[2]

• Clause 35, Guarantor’s Liability – “In consideration of the Landlord leasing the Premises to the Tenant in accordance with this lease, the Guarantors [..] unconditionally agree that they and each of them will be jointly and severally liable to the Landlord for the payment of rent and all other monies payable by the Tenant, and also for the due performance and observance of all the terms and conditions on the part of the Tenant contained or implied. And it is hereby expressly agreed and declared that the Landlord may grant to the Tenant any time or indulgence and may compound or compromise or release the Tenant without realising or affecting the liability of the Guarantors.”[3]

Held 

The Supreme Court held that the commercial lease was not terminated when the Lessee was deregistered. In this case, the lease continued and became a monthly tenancy on the basis that neither party served a notice of termination on the other as required by the holding over provisions. The continuation of the lease under the holding over provisions was not dependent on the existence of the Lessee to be in possession of the premises.

The Supreme Court held that the deregistered company was not liable for pre-existing debts nor accrued further debts. However, other parties to the agreement may still be liable for those debts. The Supreme Court noted that the findings of the Court below were based on clause 35 of the lease being construed as an indemnity rather than a guarantee.

The Supreme Court assessed the intentions of the parties to the lease when considering whether the Guarantor could be liable for the Lessee’s obligations even if the Lessee never became liable for those obligations, e.g. the payment of rent after deregistration, and whether clause 35 should be considered an indemnity or a guarantee. If an indemnity both the Guarantor and the Lessee owed a primary liability and if a guarantee, the Guarantor owed a secondary liability. The Supreme Court construed the clause as follows:

• the description of Mr Crawford as a ‘guarantor’ was not determinative and it was the party’s intention to create an indemnity as the clause expressly made the Guarantor jointly and severally liable with the Lessee to the Lessor;

• the Guarantor ’s joint and several liability was a primary liability for rent and other monies under the lease; and

• the drafting of clause 35 made the Guarantor  liable for all the obligations of the Lessee under the lease, regardless of whether the Lessee actually accrued the liabilities.

The Guarantor was held to be liable for the performance of the Lessee’s obligations under the commercial lease.

It is clear from this case that care needs to be taken when drafting a commercial lease. The Supreme Court considered the specific wording of the provisions in the lease in addition to the intentions of the parties. 

Critique and Commentary

The judgment in Crawford v Demertjis & Ruhs Pty Ltd is heavily based on the specific drafting of the lease – particularly the drafting of clause 35 – and does not address the wider legal implications of ASIC’s role when a company is deregistered. The Court did not provide detailed consideration to how the vesting of property under section 601AD of the Corporations Act might affect leasehold interests. This narrow focus provides limited guidance on the broader consequences of deregistration however clearly demonstrates the importance of drafting to reflect the intention of the parties and avoid uncertainty. 

For more information about the how to draft your commercial lease and the implications of providing personal guarantees and indemnities, please contact one of our people.

Ron Zucker 0410 590 111

Eollyn Cortes 0478 727 395

Sagang Chung 0431 435 333

Julia Zou 0426 670 202

[1] [2024] NSWSC 48 (‘Crawford’).

[2] Ibid [5].

[3] Crawford (n 1) [10].