Bank Guarantees - It Pays To Be Pedantic
It is common practice for a landlord to require that a bond be provided by a tenant to secure its obligations under the lease. Rather than a cash bond (which brings with it additional administrative requirements for a landlord), this security is commonly provided by way of a bank guarantee.
A bank guarantee is an unconditional undertaking, provided by a bank, to pay the amount secured to the favouree on written demand, without reference to the customer or tenant. The bank issuing the bank guarantee will require that the funds are ‘held’ by the tenant, ensuring that they are always available in the event that a claim is made against the bank guarantee. A landlord may only claim against a bank guarantee if the tenant is in default under the lease.
There are several matters that a landlord should consider when reviewing or accepting the form of a bank guarantee. These include:
- Whether the bank guarantee has been issued from a bank trading in Australia (that holds an Australian banking licence).
- If there is an expiry date, if the expiry date allows for an appropriate period after the expiry date of the lease to ensure that the landlord is still able to claim against the bank guarantee for any existing breaches of the lease or any rental or make good obligations.
- The terms of the bank guarantee to ensure that they do not contain any restrictions.
Many landlords prefer that the bank guarantee does not contain an expiry date at all so that if the tenant remains in the premises beyond the expiry date of the bank guarantee, the landlord still holds security for any potential loss or damages arising out of a default under the lease by the tenant. Some banks will not issue a bank guarantee without an expiry date and, in those circumstances, it is common practice to select an expiry date that is several months after the lease expiry date.
To ensure the bank guarantee is valid and can actually be used as security for the tenant’s obligations under the lease, the following should be stated on the bank guarantee:
- The names of the parties. They should appear exactly as they do on the lease.
- The address of the premises. It is good practice for the bank guarantee to also state the title details for the property.
- A statement to the effect that the bank guarantee is given in favour of the landlord as security for the tenants obligations under the lease.
- The secured amount (inclusive of GST).
It is important to understand that the original bank guarantee must be presented at the bank in order to make a claim against it. Due to this requirement, a landlord should only release the original bank guarantee in very limited circumstances, for instance, following the expiry of the lease (and within 30 days in the ACT). The original bank guarantee should otherwise be kept in a safe and secure storage space.
Many people underestimate the importance of the bank guarantee and more so, its form. It is not just a piece of paper but an effective and tangible form of security that can be claimed upon with relative ease, if prepared correctly. Often this is the only form of security called upon by the landlord to properly compensate the landlord for any damages or loss arising from a breach of the lease by the tenant.
If you have any questions about bank guarantees, please get in touch with our Real Estate Team.