Property Purchase Guarantees and Financial Risk

  • January 24th, 2024 at 1:11 pm

Small business owners should seek advice when signing agreements to avoid unintended exposure to financial responsibility.

It is common practice in property purchase contracts that a company director sign a personal guarantee when a company purchases Real Estate.

What is their liability if they do so?

Is it a personal guarantee given to ensure that that the company performs the Contract for Sale of Land? In this case, the personal liability of the guarantor is to pay damages to the vendor if the company fails to perform the agreement, which is normally the short fall on re-sale of the property.

Or is the personal guarantee given to pay the purchase price under the Contract for Sale of Land if the company fails not pay in which case it is the director’s liability to pay the purchase price to the vendor.

The questions outlined above were up for consideration in the decision in Ryan v UPG 322 Pty Ltd [2023] NSWSC 1293

Facts

Ryan, the vendor entered a Land Sale Agreement (the Agreement) in January 2023. The Agreement provided for Ryan to transfer a property in Box Hill, to the purchaser, UPG 322, for $39.5 million.

UPG 322, incorporated solely for the acquisition of the property, had plans to subdivide and develop the land. Despite being a special purpose vehicle with no financial means to complete the purchase, the vendor insisted on a director’s guarantee. Bhart Bhushan provided the personal guarantee as the sole director of UPG 322. He was also the sole shareholder and controller of the holding company, Universal Property Group Pty Limited (UPG Group).

According to the terms of the Agreement, the completion date was set for April 18, 2023. The vendor issued a Notice to Complete, which lapsed on May 3, 2023. Although the settlement date was extended twice at the purchaser’s behest, UPG failed to fulfill the terms of the Agreement.

Issues

In a situation like this, most sellers would typically terminate the Agreement and retain the deposit. If they decide to resell the property in the same market, they could likely secure a comparable price, and the deposit would be sufficient to cover the resale and holding costs. An alternative for a seller is to seek an order for specific performance, compelling the buyer to fulfill the Agreement by paying the purchase price. In these proceedings, the vendor opted for the latter course.

The summons sought orders for the specific performance of the Agreement by UPG 322 (the purchaser) and Bhart Bhushan (the guarantor) concerning the payment of the purchase price.

The primary point of contention during the hearing was whether a specific performance order for payment should be imposed on the guarantor. This argument was advanced due to concerns that the purchaser might not fulfill its obligations under the Agreement. The court supported this approach, noting that Mr. Bhushan had complete control over UPG 322’s affairs, and it was essentially his decision whether UPG received support from other UPG group members or possibly from Mr. Bhushan personally to meet the purchase price.

The Proceedings – the Consideration

The defence heavily relied on the precedent set by the High Court of Australia in the case of Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 (Sunbird). In that particular case, the guarantors had collectively and individually guaranteed “the performance by [the purchaser company] of all the terms and conditions of the Agreement for Sale, including the payment of all monies payable hereunder by [the purchaser].” Similar to the present case, the settlement of the Agreement had not occurred in Sunbird.

Chief Justice Mason in Sunbird held that the guarantee did not create a ‘debt presently payable by the guarantors.’ Consequently, the only available claim against the guarantors was for damages resulting from a breach of Agreement, not for specific performance.

The personal guarantee in the Ryan case was inserted as a special condition which means it did not follow the standard format for a personal guarantee. The clause included an additional paragraph at the end that established liability ‘as principal.’ It read as follows:

“Guarantee and Indemnity

If the property’s Purchaser is a Company, the individuals executing this Agreement on behalf of the Company or attesting to the affixing of the Company’s seal to this Agreement (referred to as “Guarantor”) hereby jointly and severally:

(i) Unconditionally guarantee the Vendor the fulfillment of all obligations of the Purchaser under this Agreement, including the payment of all monies owed by or recoverable from the Purchaser. This guarantee remains valid even if this Agreement is not enforceable against the Purchaser in whole or in part or is modified without notifying the Guarantor.

(ii) Indemnify the Vendor for any breach by the Purchaser under this Agreement.

(iii) Acknowledge that the provisions of this clause are deemed to constitute the execution of a Deed by virtue of their signing of this Agreement.

This guarantee and indemnity are provided by each Guarantor as a principal and are not discharged or released by any release or modification of this Agreement.”

The Court identified three challenges to accepting the guarantor’s defence against an order for specific performance:

“The first point is that if the guarantor is not considered liable until there has been a default by the purchaser, that condition is met. In fact, UPG 322 has been in default since April 18 when the Agreement initially required completion.” [paragraph 71]

“Secondly, and more broadly, I am not sure that the guarantee obligation in the present case arises only upon the purchaser’s default.” … “In my view, the critical factor in the present case is that the guarantor’s obligation is stated to be given as principal. … the better reading of the clause is that it creates a concurrent obligation.” [paragraphs 72, 77]

“The third and fundamental obstacle derives from the nature of these proceedings. I am not dealing with a claim in debt or damages, but with an equitable claim for the grant of orders of specific performance.” … equitable relief is granted on a quia timet basis which does not depend on any liability existing at law.” [paragraphs 78, 85]

The Orders

The court made orders of Specific Performance against the purchaser and the guarantor requiring them both, jointly and severally, to pay the purchase price together with contract adjustments, on settlement.

The court further observed that the PEXA platform allows for a purchaser’s financier to participate in the settlement so as to provide the money. Therefore, the court saw no issue in making similar arrangements for the guarantor to be a party to the settlement transaction so that, if the purchaser were unable to pay, the guarantor could make up the difference. Furthermore, In addition to an order for payment of the purchase price, interest was to be added as provided in the Agreement.

Comments                                                                           

The purpose of a director’s guarantee in a Agreement for Sale is to ensure that the corporate purchaser performs the Agreement for Sale. This is a simple example of a guarantee:

The Guarantor guarantees to the Seller:

  1. The performance and observance by the Buyer of all its obligations and warranties under the Agreement, before, on and after completion of the sale:
  2. The payment of the balance purchase price and any other moneys payable under the Agreement by the Buyer to the Seller and to third parties.

However, some director guarantees go further and make the guarantor liable as a principal to pay the purchase price. This is what was added to the guarantee in Ryan:

“This guarantee and indemnity is given by each Guarantor as a principal and is not discharged or released by any release or variation of this Agreement”

Takeaway

Solicitors and conveyancers acting for purchasers need to distinguish whether the personal guarantee is drafted with or without ‘liability as principal’ when advising personal guarantors of corporate purchasers, because significantly different liabilities flow from each.

If any member of the Association would like to learn more or needs assistance in relation to possible financial risks when purchasing a property, contact Ishita Rao and Peter Jackson at FCW Lawyers.