Part 2: How to secure a commercial lease with a bank guarantee

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Table of Contents

• Value of Guarantee
• Possession
• Rent Reviews
• Lease Renewal
• Storage
• Audit
• Conclusion

Welcome to Part 2 on “How to secure a commercial lease with a bank guarantee”. Following on from part 1, we will discuss some of the other points to consider when seeking to secure a commercial lease with a bank guarantee, including lease renewals, the process of auditing, and the importance of agreeing on where a bank guarantee is kept.

Value of Guarantee

How much is being guaranteed under the bank guarantee? For example, if GST forms part of the rental obligations or other payments under the terms of the lease, make sure the bank guarantee also accounts for GST. For example, if the bank guarantee covers 3 months of rent and this equates to $60k, the total being guaranteed should be $66k if the tenant is intending on reimbursing for GST.

Possession

It is prudent to withhold possession from the tenant until a valid bank guarantee has been provided and legal advice is obtained regarding its validity. A typical turnaround for banks to issue a bank guarantee is 48 hours.

Rent Reviews

In some cases, the terms of the lease will provide that as the rent increases, following a rental review, so too will the amount being guaranteed under the bank guarantee. The landlord must enforce this by approaching the bank with a request for a new bank guarantee by citing the particular provision under which the increase is permitted.

Lease Renewal

When a tenant decides to exercise an option in the lease, or an entirely new lease is granted to the tenant, a fresh bank guarantee will need to be sought. The previous bank guarantee might have already passed its expiration date, or may have become invalid because it no longer accurately reflects the terms of lease (if, say, for example, a rent review has occurred and the rent is for a different amount). To avoid agreeing to enter into a new lease without this added security, the original bank guarantee will need to be swapped for the new updated one.

Storage

Where will the lease be kept? Who will hold it and keep it safe? Make sure everyone, including the tenant, landlord, as well as their lawyers and any agents, know where it is being stored. Once you agree on which party will maintain the original copy, copies should be given to each of the other parties. Normally the bank guarantee is kept in the same place as the lease, as this is more convenient.

Audit

Every now and then it is a good idea to conduct an audit on the properties you currently lease to tenants for which bank guarantees have been provided. This will bring to light any expired bank guarantees or issues with validity. Keep in mind that banks provide these guarantees on a standard form and they are very unlikely to be willing to modify or amend this form in anyway.

Conclusion

If you have been given a bank guarantee that does not comply with the above, it might be worth looking into alternative means of securing the lease, such as a security deposit.

If you would like a leasing lawyer to review your bank guarantee in conjunction with the terms of your lease, contact LegalVision on 1300 544 755 and have a chat with one of our specialist lawyers today.