Personal Guarantees in Commercial Leases: Risks for Directors

How personal guarantees in commercial leases work

The first question in any dispute about personal guarantees in commercial leases is deceptively simple: who promised to do what?

A company has its own legal capacity and can enter a lease in its own name under s 124(1) of the Corporations Act 2001 (Cth). A director can execute the document for the company under s 127(1) or (2) without becoming the tenant. That corporate signature is not, without more, a promise to pay the company’s rent from the director’s own pocket.

The position changes where the director signs again as guarantor or indemnifier. The company then owes its obligations under the lease. The individual has a separate contract with the landlord. The two liabilities may concern the same default, but they do not arise from the same promise.

That distinction is commercially significant. A newly formed proprietary company may own little more than stock, fit-out and receivables, while committing to five or ten years of rent. A landlord therefore seeks recourse to a person or entity with assets outside the tenant company. From the director’s perspective, the guarantee removes a substantial part of the protection that leasing through a company was intended to provide.

Signing for the company is not the same as signing personally

Execution pages deserve the same attention as rent and term. A director may appear in several capacities: authorised signatory for the tenant, guarantor, indemnifier, or witness to another signature. Sometimes the personal guarantees in commercial leases. Sometimes it is a separate deed. Occasionally the schedule names a guarantor but the operative guarantee has not been properly executed. Those are not cosmetic differences.

The review should start with the executed version, not an unsigned draft or heads of agreement. Check the definition of “guarantor”, the operative promise, the signature block and any deed formalities. Then work outward to the lease obligations said to be secured. A demand letter that quotes a broad liability clause is not a substitute for that exercise.

What a commercial lease guarantee can expose a director to

There is no standard ceiling. Liability depends on how the particular documents are construed and on the tenant’s underlying liability.

Narrowly drafted personal guarantees in commercial leases might secure rent for a fixed period and nothing more. A common landlord form is much wider. It may cover every present and future obligation of the tenant, including:

• rent and statutory or contractual outgoings;
• interest on overdue amounts;
• repair, reinstatement and make-good obligations;
• damages payable after termination, including loss of bargain where legally recoverable;
• costs of re-letting or dealing with abandoned premises, where the lease permits recovery;
• legal and enforcement costs within the contractual costs clause; and
• obligations arising during an option term, renewal, extension or holding over.

The words “all obligations” should not be read as a dollar figure. A director considering a five-year lease often thinks in terms of one or two months of unpaid rent. The larger risk may emerge after the premises are vacated: reinstatement works, incentives to a replacement tenant, a rental shortfall and litigation costs can accumulate while the tenant company has no funds.

A guarantee and an indemnity do different work

Personal guarantees in commercial leases are ordinarily a secondary promise: the guarantor answers for the debtor’s obligation. An indemnity is commonly drafted as a primary obligation to protect the landlord against specified loss. Commercial lease documents often combine both in one clause and include language designed to preserve liability despite events that might otherwise affect a surety.

That drafting matters when the tenant’s obligation is disputed, varied, unenforceable or compromised. It is unsafe to assume that a defence to the guarantee necessarily disposes of the indemnity. Equally, calling a clause an “indemnity” does not give the landlord more than its words support. Each limb must be construed in the context of the complete transaction.

Case example 1: Chan v Cresdon and the words “under this lease”

In Chan v Cresdon Pty Ltd (1989) 168 CLR 242; [1989] HCA 63, a Queensland lease required registration but was not registered. The parties had an equitable lease. The guarantee covered the tenant’s obligations “under this lease”. The High Court held that, on the wording used, the guarantee referred to obligations under the legal lease contemplated by the document, not the distinct equitable lease that had arisen.

The point is not that an unregistered lease always defeats personal guarantees in commercial leases. Modern documents are often drafted to reach an agreement for lease, an equitable lease, occupation before registration, renewals and variations. The useful lesson is narrower and more durable: the court identifies the legal source of the obligation and asks whether the guarantee actually covers it. Broad commercial expectations cannot repair a gap in the words chosen.

Case example 2: Gumland and liability after termination

Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237; [2008] HCA 10 concerned a terminated lease and claims that included arrears, outgoings, reinstatement costs and loss of bargain damages. The High Court restored judgments against the individual guarantors exceeding $2 million, together with interest.

That outcome should correct the common assumption that a guarantee is confined to overdue rent at the date the doors close. Whether loss of bargain damages are available depends on the lease terms, the breach, the basis of termination and orthodox contractual principles. But if the tenant is liable and the guarantee reaches that liability, termination can enlarge rather than end the guarantor’s practical exposure.

Can the landlord pursue the director if the company fails?

Usually, company failure makes personal guarantees in commercial leases more important, not less. Liquidation does not erase a separate promise made by the director. The landlord may lodge a proof in the company’s winding up and also pursue an enforceable guarantee, while remaining subject to the rule against recovering more than the total loss.

The landlord’s right to immediate payment still depends on the contract. Some personal guarantees in commercial leases make liability arise on tenant default. Others require a demand. A lease may require a notice to remedy before particular termination rights arise. The amount demanded may also assume that every item owed by the tenant falls within the guarantee, which is not always correct.

For a director receiving a demand, the sensible sequence is:

1. obtain the complete executed lease, guarantee and indemnity;
2. identify the default and the clause said to create the tenant’s liability;
3. identify the corresponding words that extend that liability to the guarantor;
4. check any contractual notice, demand and cure requirements;
5. review every variation, option, renewal, assignment, surrender and settlement; and
6. test the calculation, mitigation evidence and claimed costs rather than treating the total as self-proving.

An unpaid judgment can be enforced against the guarantor’s assets in the ordinary way and may support personal insolvency action if the statutory requirements are met. The family home is not protected merely because the debt originated in a company lease. Ownership, co-ownership, mortgages, other securities and insolvency law all affect what may ultimately be realised.

Do resignation, sale or assignment end a personal lease guarantee?

No single event should be treated as an automatic release.

Resigning as director changes the person’s corporate office. It does not rewrite a contract previously signed in a personal capacity. Selling shares is also different from assigning the lease: the tenant company may remain exactly the same legal person, with the existing guarantee untouched. Vacating the premises does not surrender the lease unless the landlord accepts a surrender or another legal basis for termination exists.

Assignment requires closer analysis because Queensland now has two statutory release regimes with different conditions.

Retail shop lease assignments under s 50A

For a lease within the Retail Shop Leases Act 1994 (Qld), s 50A(2) releases the assignor and its guarantor from liability under the lease resulting from a default by the assignee when the assignment is entered into. The release is conditional. Under s 50A(1)(a)-(b), the assignor must have complied with the disclosure obligation in s 22B, or a relevant order under s 22E(2), and the disclosure statement must not be defective. Section 50A(3)(a)-(b) defines that defect by reference to material incompleteness or materially false or misleading information.

This is one reason assignment disclosure is not a box-ticking exercise. A defective statement can jeopardise the very release on which the outgoing director expects to rely.

The narrower release under the Property Law Act 2023

Section 144 deals with a chain of assignments. The original lessee assigns to an assignee; that assignee later assigns to a subsequent assignee. Only then does s 144(2) release the original lessee and its guarantor from liability to the lessor for a breach by the subsequent assignee. The protection operates despite contrary agreement under s 144(3).

Two boundaries are easily missed. It is not a release on the first assignment. It does not wipe accrued liability for the original lessee’s breach or the first assignee’s breach. More fundamentally, s 255(2) says s 144 applies only if the lease was entered into after commencement of the new regime on 1 August 2025. Older leases do not acquire this protection merely because a later assignment occurs.

Real-world example: a sale of shares without a lease assignment

Assume two founders sell all shares in their café company. The company remains the named tenant, so there is no assignment of the lease. One founder resigns as director and hands over the keys. If that founder guaranteed the tenant’s obligations, neither the share sale nor resignation necessarily releases personal guarantees in commercial leases. The sale agreement may allocate the risk between buyer and seller, but an indemnity from the buyer is not the same as a release by the landlord. If the company later defaults, the former founder may have to pay the landlord and then pursue the buyer under the private indemnity.

Real-world example: a compliant retail assignment

Assume a Queensland retail shop tenant sells its business and assigns the lease with the landlord’s consent. The assignor supplies the disclosure statement and current lease in accordance with s 22B(1)-(3), and the statement is not materially defective. When the assignment is entered into, s 50A can release the assignor and its guarantor from liability resulting from the incoming tenant’s later default. The outgoing parties remain responsible for liabilities outside the statutory release, including their own earlier defaults.

How directors can limit personal guarantee risk

The best opportunity is before the lease is signed. Once premises have been fitted out and trading has begun, the landlord has little incentive to surrender valuable security without receiving something in return.

Negotiation can focus on one or more of the following:

• a fixed dollar cap or a cap expressed as a defined number of months’ rent;
• exclusion of consequential liabilities, make-good or loss of bargain damages;
• an expiry date after a period of compliant trading;
• automatic release on a permitted assignment or sale, without waiting for a second assignment;
• release when the tenant meets agreed financial tests;
• liability confined to the initial term, excluding options, renewals and holding over;
• consent requirements before variations can increase the guarantor’s exposure; or
• substitution of a bank guarantee, security deposit or parent-company guarantee.

A cap needs careful drafting. A nominal cap may be undermined if interest and enforcement costs sit outside it. A time limit may stop new liability accruing but leave earlier breaches alive. A release “on assignment” may be subject to conditions that are never satisfied. The negotiated protection should say what happens, when it happens, and which liabilities survive.

Where several directors guarantee jointly and severally, the landlord may pursue one for the whole guaranteed debt, leaving contribution issues between guarantors to be resolved separately. A departing director should therefore deal with the landlord’s release directly, not rely only on assurances from continuing directors.

Reviewing a demand under a commercial lease guarantee

The factual chronology often decides as much as the drafting. The following documents should be assembled before a response is given:

• the final executed lease and every guarantee or indemnity;
• disclosure statements and any agreement for lease;
• variations, option notices, renewal documents and holding-over correspondence;
• assignment deeds, consents, sale documents and disclosure given on assignment;
• default notices, demands, termination notices and surrender documents;
• rent ledgers, outgoings reconciliations and interest calculations;
• make-good reports, invoices, re-letting documents and evidence of mitigation; and
• any deed of release, settlement or standstill agreement.

The response should separate liability from quantum. A guarantor may accept that rent was unpaid but dispute future rent, an inflated make-good scope or indemnity costs that the contract does not support. Conversely, a strong technical argument about one limb of personal guarantees in commercial leases may have limited value if a separately drafted indemnity reaches the same loss.

Common mistakes directors make with lease guarantees

Treating the signature page as administration

The signature block determines capacity. A second signature can convert a company transaction into a personal exposure lasting years.

Reading the guarantee but not the indemnity

The two promises may respond differently to a defect in the tenant’s obligation. Both require separate analysis.

Assuming a maximum exposure from the current arrears

Termination, make-good, re-letting and contractual costs can exceed the rent already overdue. Gumland is a stark example.

Relying on resignation or a private indemnity

Neither binds the landlord unless the landlord agrees. A private indemnity may provide a right of recovery later, but it does not stop the landlord suing the original guarantor.

Overlooking statutory conditions on assignment

The retail release under s 50A depends on compliant, non-defective disclosure. The general release under s 144 applies only after a second assignment and only to post-commencement leases.

Frequently asked questions about personal guarantees in commercial leases

Can a landlord sue me personally if my company cannot pay the rent?

Potentially. The landlord needs an enforceable personal obligation, usually a guarantee or indemnity, and must establish that the claimed loss falls within it. Directorship alone is insufficient.

Does liquidation of the company cancel my guarantee?

No. Liquidation of the tenant does not itself discharge a separate guarantee or indemnity. It may be the event that causes the landlord to rely on that security.

Am I liable for the whole remaining lease term?

Possibly, but not automatically. Liability for future loss depends on the tenant’s underlying liability, the validity and basis of termination, mitigation, and the scope of the guarantee or indemnity. Gumland demonstrates that exposure can extend well beyond accrued rent.

Does resigning as director end the guarantee?

Not by itself. The promise was made personally. Obtain an express release from the landlord or identify a specific contractual or statutory release.

Does assigning the lease release me?

It depends. Section 50A may release an assignor and guarantor on a qualifying retail assignment if the disclosure conditions are satisfied. Section 144 of the Property Law Act 2023 is narrower and operates only after a second assignment for leases entered into after 1 August 2025. Otherwise, the parties should negotiate an express release.

Can the landlord claim make-good costs from a guarantor?

Yes, if the tenant is liable for those costs and a personal guarantee in commercial leases or an indemnity extends to that liability. The landlord must still prove the contractual obligation and the amount claimed.

Can I negotiate the guarantee?

Yes. The landlord may refuse, but caps, expiry dates, limited obligations and assignment releases are legitimate commercial terms. The strongest negotiating position is before execution.

What should I do when a demand arrives?

Do not respond from the demand alone. Obtain the executed documents, identify the exact default and contractual trigger, review notices and later transactions, and test every component of the calculation. Early advice is particularly valuable before admissions, payment arrangements or asset-enforcement steps complicate the position.