Bank guarantees are usually required under the terms of any retail or commercial lease. This is because they give landlords some security against the potential loss that could arise out of a potential default by the tenant on rental payments or other breaches.

Being a landlord means you should take care to review the bank guarantee to ensure that it is valid and that it actually provides security in respect of the lease in the event of a default. Many landlords fail to take such appropriate steps and instead simply file it until some sort of default arises or the lease term expires and it is returned to the tenant.

It is unfortunately quite common for a landlord seeking legal advice after an event of default to hand over a bank guarantee that is expired or invalid. Sometimes landlords forget where the bank guarantee has been filed.

There are a number of legal considerations, set out below, that should be taken into account by a landlord when accepting a bank guarantee from a tenant.

Bank

When accepting a bank guarantee, it is important for the landlord to check that it comes from a bank that has an Australian trading licence. This does not mean that you should not accept a bank guarantee from a foreign bank, just that that foreign bank needs to have a valid banking licence. Keep in mind that the format of foreign bank guarantees will be different to Australian bank guarantees, so make sure to carefully review them.

Expiration Date

Normally bank guarantees will not have any expiration date. If, however, the bank of the tenant demands that an expiration date be included on the guarantee, it typically runs for a least 3 months after the lease has expired.

This 3-month window usually gives the landlord enough time to pursue a tenant who has breached the lease, for example by failing to ‘make good’ the premises to its original state, or leaving before the final rental payment has been made. They can then use the bank guarantee to enforce their rights.

In favour of the landlord

Another important feature on any bank guarantee is that it is made out in favour of the landlord and not some other party. The name of the landlord should also be checked for spelling to ensure it remains enforceable.

Location

Make sure the bank guarantee expressly states the address of the premises to which it relates. This description must be accurate for the bank guarantee to remain valid. Do not forget to add the suite number where applicable!

Conclusion

Securing a lease with a bank guarantee is common, however, if not done correctly can lead to the invalidity of the guarantee. In Part 2, we will be looking at some other important points to remember when accepting a bank guarantee as security for a commercial lease, such as checking the amount being guaranteed, withholding possession until receiving the guarantee, and the consequence of a rental review on the validity of the guarantee.

For fixed-fee legal advice on bank guarantees, contact LegalVision on 1300 544 755.

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