Like friends at your beach house in January: How charging clauses have a funny way of just turning up

We are regularly tasked with reviewing various commercial contracts, generally briefed with the sole instruction of identifying notable risks for our clients. Of late, a seemingly prevalent risk is rogue charging clauses popping up in sometimes unlikely places.

A charging clause is often intended to make the beneficiary of the clause a secured creditor who (depending upon the drafting) may then, for example, lodge a caveat over any land owned by the person granting the charge. This is particularly dangerous when such charging clauses extend to the property of guarantors under such contracts.

Whilst charging clauses can be prevalent in terms of trade and supply contracts, we have also often identified them in many other contracts such as commercial leases (particularly in standard leases for shopping centres or larger property holding companies). Their inclusion in commercial leases can be onerous and unreasonable as such contracts often already contain adequate provisions to secure the landlord’s interests (like security deposits, bank guarantees and personal guarantees).

An illustration of how such clauses can have devastating consequences when included in a commercial lease is where, say, a parent or spouse provides a personal guarantee on a commercial lease and the tenant subsequently defaults in its obligations due to deteriorating business conditions or poor management.

In such a situation, the landlord could, in theory, end up acquiring an interest in the family home or even land that is acquired much later (way after the lease is even entered into). Having then lodged a caveat on the parents or spouse’s property, the landlord could then block a sale of the property until such time as it is paid the debt in full together with its legal and enforcement costs.

In many circumstances, the tenant need not even be insolvent for this to happen as many such guarantees will allow the landlord to choose whether to pursue the tenant or the guarantor in its absolute discretion. Oftentimes, a creditor will go for the low hanging fruit and pursue whichever party has land assets or is most likely to succumb to pressure when enforcement action begins.

Sound professional guidance is essential when navigating contracts with charging clauses, particularly when personal guarantors (with significant assets) are required. Often, with the right guidance, clients can effectively negotiate the exclusion of charging clauses and find a compromise position which provides satisfactory security and certainty for all parties.

If you require advice in relation to identifying risks in your leases (or commercial contracts generally), contact a member of our team for on-point, practical guidance.

Joseph Carneli, Senior Associate

2019-09-04T03:35:14+00:00September 3rd, 2019|Business Advice, Business Partnerships, Contracts, Corporate Advisory, Dispute Resolution|Comments Off on Like friends at your beach house in January: How charging clauses have a funny way of just turning up