Case Note: Zhao v Kontomichalos [2026] VSCA 30

Introduction

A recent Court of Appeal decision of Zhao v Kontomichalos [2026] VSCA 30 again highlighted the importance of careful contractual drafting, and the timely review of your legal position, whether as landlord, lessee or guarantor, when lease terms come to an end.

The practical outcome which landlords should be aware of, is that the landlord in this matter found itself without a guarantor to turn to for a significant debt which had accrued after the landlord itself brought the leases concerned to an end for repudiation, but allowed the tenant to remain in possession on a month-to-month basis on the same terms as set out in each lease.

The Appeal

The appeal turned on a narrow but important construction question of whether the guarantee of a tenant’s obligations under a lease extend to liabilities arising after termination, where the tenant remains in possession under a new arrangement such as a periodic tenancy.

Decision

While this matter turned on the interpretation of the particular lease and guarantee in question, the Court of Appeal emphasized that the obligations of a guarantor are tethered to the underlying obligation which they guarantee, and not simply the factual occupation of premises.

The scope of the guarantee is determined by reference to the lease obligations as properly construed in their contractual context, rather than by the mere fact of continued occupation.

The Court affirmed that this is a matter for the settled principles of contractual interpretation.

While it wasn’t necessary in this case, the Court noted that the liability of a guarantor is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the guarantor. Accordingly, where a guarantee is ambiguous as to the extent of its reach, that principle may operate to confine the guarantee to obligations arising under the lease itself, such that, absent clear words, it will not ordinarily be construed as extending to obligations arising under a new agreement between a principal debtor and creditor, in this case the tenant and the landlord.

The Court of Appeal found that, absent clear words to that effect, the guarantee of a tenant’s obligations “under the lease” does not extend to liabilities arising under a new legal basis of occupation (such as a periodic tenancy), even if that occupation follows immediately from the lease. Whether a new legal basis has arisen will always be fact-specific and it is therefore important to give careful attention to the basis on which a tenant remains in occupation beyond the lease.

Conclusion

A practical takeaway for landlords is to give advance attention to the legal effect of your tenant remaining in occupation after their lease term expires and to ensure that you have effective guarantees in place to cover any further periods of occupation.  

How Sharrock Pitman Legal can help

Even a seemingly straight-forward commercial lease can give rise to a dispute. When a network of parties are involved, such as a landlord, lessee or guarantor, the arrangements are much more complex. A well-drafted lease from the outset and knowing your legal position at the end are critical to minimising risk and defending your position, should the need arise.

Our Disputes & Litigation team advises landlords and lesees, and has a successfully resolved commerial lease disputes for a range clients.

If we can assist you, please do not hesitate to contact us on 1300 205 506 or email sp@sharrockpitman.com.au.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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