Bank guarantees to secure a tenant’s performance under a lease
It is widely common in retail and commercial leases for tenants to provide either a security bond or a bank guarantee to ensure the tenant’s performance of its obligations under a lease. In this article, we have set out some common requirements of landlords in relation to bank guarantees.
What is a bank guarantee?
A bank guarantee provides the landlord security of a guaranteed payment on demand where required under a lease, with the purpose of ensuring performance of the tenant’s obligations under the lease. It is an undertaking from a bank to guarantee payment of the amount to the landlord.
A lease will contain provisions allowing the landlord to draw down on the bank guarantee if a tenant breaches the terms of the lease. The right for the landlord to draw down is usually without notice to or consent of the tenant.
Common requirements
From a landlord’s perspective an unconditional bank guarantee is preferred. This allows the landlord to draw down on the bank guarantee if certain events specified in the lease occur regardless of any other disputes between the parties. Landlords should be aware however that in some situations it may be restrained from relying on a bank guarantee. The case of Universal Publishers Pty Ltd v Australian Executor Trustees Ltd [2013] NSWSC 2021 determined that the bank guarantee could only be relied upon where there was an actual breach of the lease. In this instance, the landlord wanted to call on the bank guarantee before proceedings relating to the breach were finalised in court.
A bank guarantee should have the following details:
be issued from an Australia trading bank;
an accurate description of the premises;
state that it is in favour of the landlord;
state the amount (inclusive of GST);
state it is payable on demand; and
(if required by the Landlord) not have an expiry date.
Bank guarantees will be returned to the tenant on the termination or expiry of the lease if the tenant has met its obligations under the lease. It is recommended that a landlord request that the bank guarantee not have an expiry date so that the guarantee continues, expiring only when the tenant has complied with all of its obligations under the lease. Once complied, the bank guarantee is returned to the bank or the tenant by the landlord.
If the lease is subject to the Retail Leases Act 1994, the landlord must return the original bank guarantee to the tenant within 2 months of the tenant complying with its obligations under the lease.[1]
Calling on the Bank Guarantee
Landlords will often call on the bank guarantee if the tenant has been put on notice but has continued to fail to perform or comply with its obligation under the lease. Leases may contain provisions that do not require the tenant to be put on notice of the breach for example, obligations that are to be performed on a certain date. Where possible, a tenant should negotiate an ability to remedy the breach following notice.
Key takeaways
The wording of the lease is crucial for when the landlord may call on the bank guarantee. It is vital that a landlord ensures that the drafting provides adequate security for the landlord and the lease is carefully drafted to allow the tenant time to remedy a breach so to avoid the landlord calling on the bank guarantee.
If you require assistance with your commercial or retail lease(s), please contact our people.
Ron Zucker 0410 590 111
Eollyn Cortes 0478 727 395
Sagang Chung 0431 435 333
Julia Zou 0426 670 202
[1] Section 16BA of the Retail Leases Act 1994.
