Until now, all owners of the family home were exempt from land tax so long as one was an owner occupier. The NSW State Budget 2023/24 has restricted the exemption.
It is conveyancing practice that a company director signs a personal guarantee when they purchase a property in the company name.
What is their liability if they do so?
Are they giving a personal guarantee to ensure that the company performs the Contract for Sale of Land? If so, their personal liability is to pay damages to the vendor if the company fails to perform the Contract, which is normally the loss on re-sale of the property.
Or are they giving a personal guarantee to pay the purchase price under the Contract for Sale of Land if the company fails not pay? If so, their personal liability is to pay the purchase price to the vendor.
These fascinating liability issues were considered in the decision in Ryan v UPG 322 Pty Ltd [2023] NSWSC 1293 (Parker J), a decision of the Supreme Court of New South Wales (31 October 2023). This is an analysis.
The Contract for Sale
In January 2023, the vendor (Ryan) entered into a Contract for Sale of Land to sell to the purchaser (UPG 322) a property at Box Hill in outer north-western Sydney. The purchase price was $39.5 million. The purchaser intended to subdivide and develop the land.
The purchaser was a company registered for the purpose of purchasing of the property. As a special purpose vehicle, it did not have any financial resources to complete the purchase. The vendor required a director’s guarantee. Mr Bhart Bhushan gave the personal guarantee because he was the sole director of UPG 322 and the sole shareholder and controller of the holding company, Universal Property Group Pty Limited (UPG Group).
The completion date under the Contract was 18 April 2023. The vendor served a Notice to Complete which expired on 3 May 2023. The settlement date was extended twice at the purchaser’s request, but UPG failed to complete the Contract.
Why the purchaser was unable to complete the Contract was not revealed in the judgment. UPG 322 had entered into the Contract after exercising a call option made in October 2021, so it would have been satisfied as to development feasibility. The reason must have been a financial reason, that loan funding was not available or was not sufficient to settle the Contract, possibly because the property value had fallen.
The proceedings – the issues
Most vendors in that position would terminate the Contract and forfeit (i.e. keep) the deposit. If they re-sell the property in the same market they might receive a similar price and the deposit would sufficient to cover the re-sale costs and the holding costs.
The alternative for a vendor is to obtain an order for specific performance of the Contract, that the purchaser be ordered to complete the Contract by paying the purchase price. This is the course the vendor chose in these proceedings.
Why the vendor chose specific performance was not revealed in the judgment. It is probable that the value of the property had fallen by more than 10%. If so, a deposit of 10% of the price would not cover the likely loss on re-sale.
The summons was for orders that the Contract be specifically performed by UPG 322 (the purchaser); and by Bhart Bhushan (the guarantor) so far as payment of the purchase price is concerned.
The main issue debated at the hearing was whether an order for specific performance (for payment of the price) should be made against the guarantor. This was pressed because of the risk that the purchaser would not comply with its obligations under the Contract. This approach met with the Court’s approval:
“On the facts of this case, Mr Bhushan was in complete control of the affairs of UPG 322. And it was essentially up to him as to whether UPG was provided with support from other members of the UPG group (or perhaps from Mr Bhushan personally) to come up with the purchase price.” [p 76]
The proceedings – the consideration
The defence relied heavily on the High Court of Australia decision in Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245. In that case, the guarantors had jointly and severally guaranteed “the performance by [the purchaser company] of all the terms and conditions of the Contract for Sale including the payment of all monies payable hereunder by [the purchaser].”
As in this case, settlement of the Contract had not taken place in Sunbird.
Mason CJ said that the terms of the guarantee were such that there was no ‘debt presently payable by the guarantors’, and that therefore the only claim available against the guarantors was for damages for breach of contract, not specific performance.
The personal guarantee in Ryan was in the normal form, but with an extra paragraph at the end which created liability ‘as principal’. It was:
“Guarantee and Indemnity
If the Purchaser of the property is a Company …, the officers or persons who execute this Contract on behalf of the Company or who attest the affixing of the seal of the Company to this Contract (“Guarantor”), hereby jointly and severally:
(i) unconditionally guarantee to the Vendor the performance of ail obligations of the Purchaser under this Contract, including payment of all money payable by or recoverable from the Purchaser, notwithstanding this Contract is not enforceable against the Purchaser in whole or in part or is varied without notice to the Guarantor;
(ii) indemnify the Vendor in respect of any default of the Purchaser under this Contract; and
(iii) acknowledge the provisions of this clause shall be deemed to constitute the giving of a Deed by virtue of their execution of this Contract.
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 Contract.” [p 67]
The Court identified three obstacles to the acceptance of guarantor’s defence to an order for specific performance:
“The first point is that if the guarantor cannot be said to be liable for relevant purposes until there has been a default by the purchaser, then that condition is satisfied. In fact, UPG 322 has been in default since 18 April when the contract initially required completion.” [p 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.” [p 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.” [p 78, 85]
The proceedings – the orders
“I see no difficulty at all in making an order against both the purchaser and the guarantor requiring them both, jointly and severally, to pay the purchase price, together with contractual adjustments, on settlement.
The PEXA platform allows for a purchaser’s financier to participate in the settlement so as to provide the money. As I understood it, there was no dispute before me that similar arrangements could be made 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.” [p 88]
In addition to an order for payment of the purchase price, interest was to be added as provided in the Contract.
Comments
The purpose of a director’s guarantee in a Contract for Sale is to ensure that the corporate purchaser performs the Contract for Sale. This is a simple example of a guarantee:
The Guarantor guarantees to the Seller:
-
- The performance and observance by the Buyer of all its obligations and warranties under the Contract, before, on and after completion of the sale:
- The payment of the balance purchase price and any other moneys payable under the Contract by the Buyer to the Seller and to third parties.
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 Contract
The take-out is:
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.