Deeds of cross-guarantee as lease security – what a landlord needs to know

We have recently seen deeds of cross-guarantee being offered up by tenants looking to provide landlords with alternative forms of security to bank guarantees, as banks tighten up lending requirements, or parent company guarantees.

What is a cross-guarantee?

Typically a deed of cross-guarantee is lodged by a parent company with ASIC in support of its subsidiaries to assist the grouping of corporate groups for accounting and tax purposes. Under a deed of cross-guarantee, each company within the corporate group agrees to guarantee the payment of any debt to a creditor of all the other companies within the corporate group. At face value, this can be a seemingly attractive form of security for landlords, particularly when an ASX listed company is a member of the corporate group.

How are they enforced?

However, deeds of cross-guarantee can be difficult to enforce when compared to more traditional security provided in the form of a bank guarantee or parent company guarantee. In practice, in order to enforce a deed of cross-guarantee for a tenant default (e.g. non-payment of rent), a landlord would be required to sue the tenant, obtain judgment, have an administrator or liquidator appointed over the tenant and then ‘encourage’ the administrator or liquidator to seek to enforce the cross-guarantee against the other companies in the corporate group. The ability for a landlord to control this process would be quite limited as presumably secured creditors will take action under the cross-guarantee and a landlord will most likely lose control of the action against the tenant.

In addition, even if a landlord is successful, their ability to recover the debt is further diluted by the fact that they are merely an unsecured creditor of the tenant, being subservient to secured creditors and priority payments.

The above process for enforcing a deed of cross-guarantee is a long way removed from the more direct rights that a bank guarantee or parent company guarantee provide.

Other potential issues that can arise in relation to the enforceability of a deed of cross-guarantee include:

• • the group of companies which are party to the deed of cross-guarantee may revoke the deed of cross-guarantee (without regard to the landlord) at any time; and
  • the tenant could be removed from the deed of cross-guarantee (without regard to the landlord) at any time.

Recommendations

In our view, a deed of cross-guarantee is an inferior form of security to a bank guarantee or parent company guarantee and landlords should be reluctant to rely on a deed of cross-guarantee as security. Further, there are very limited circumstances when a deed of cross-guarantee should be relied upon by landlords as part of security being offered by tenants and given the inherent issues with enforceability outlined above, there are even less circumstances (if any) where we would recommend it as a standalone security.

Authored by:

Lui Scipioni, Partner

Dayna Thomas, Senior Associate

Michael Mercier, Associate