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When you are buying or selling a business with leased premises, your landlord may ask you to provide a bank guarantee or a security deposit. A bank guarantee is the promise of a payment to a third party to secure a lease or a property purchase. If you are an incoming or outgoing tenant, you may be wondering what the process is to provide or recover your bank guarantee. This article unpacks the key considerations when you provide or recover a bank guarantee.

What is a Bank Guarantee?

A bank guarantee is a promise, made by a bank, of a payment to a third party, on demand, based upon an event or condition. For example, you can use a bank guarantee to promise payment to your landlord to secure your obligations under the lease.

A bank guarantee details:

  • the name of the favouree. In this case, the favouree is the landlord;
  • the Australian Company Number (ACN) or Australian Business Number (ABN) of the favouree, if applicable;
  • the reason for the guarantee;
  • the amount of the guarantee; and
  • when the guarantee will expire. Usually, a landlord will require that there is no expiry date, or that it is at least three to six months after the expiry date of the lease.

There are rules specifying the type of entity that can legally be the favouree of a bank guarantee. If the favouree is a trust, you will need the details of the trustee before a bank issues you a guarantee. Likewise, you will need the details of both partners in a partnership.

If you are purchasing a business, you may need a bank guarantee for a security deposit for your lease. Other reasons why you might need a guarantee include:

  • buying property off the plan; or
  • providing a contract performance guarantee.

Your guarantee will typically expire when your liability to the favouree expires. If your lease has options, you can notify your bank so your landlord can extend the guarantee if you exercise the option.

Each bank has guarantee and establishment fees. You should check with your bank to find out how this will be charged to you.

How Does a Buyer Provide a Bank Guarantee?

As a buyer, you need to provide the bank with the correct details so they can issue you a guarantee. Before going to the bank, check your lease to see what you need to include as part of the bank guarantee. You should also confirm what to include with your landlord’s solicitor. This is because the bank guarantee needs to be accurate and specific. For example, if the bank guarantee requires an amount equivalent to three months’ rent, plus GST, then you need to specify that amount.

Your bank may want to look at your lease to ensure the guarantee complies with the requirements of the lease.

It is essential the guarantee uses the correct wording. Otherwise, your bank guarantee may be invalid. This might further delay the process before you can move into the premises. You should remember that it can take up to two to three weeks to process your guarantee. Therefore, you should start the process early to avoid delaying settlement.

How Does a Seller Recover a Bank Guarantee?

Usually, the landlord will return your bank guarantee once the buyer has provided theirs. They will only do this if you have complied with your lease obligations up until the assignment of the lease to the buyer. You are obliged, for example, to pay your rent and outgoings and keep the premises in fit condition.

It is important you follow up with your landlord to ensure they return the bank guarantee to you within a reasonable timeframe. Once the landlord has returned your guarantee, you can go to the bank with the original guarantee for them to cancel it. Alternatively, the landlord can confirm with the bank that they no longer require the guarantee and provide the bank with their signature. This will also cancel the bank guarantee.

Key Takeaways

It is essential you follow the correct process to provide or recover a bank guarantee. You should be precise in your wording and the details you give to your bank. Therefore, before you go to the bank and request a guarantee, check your lease. You should also speak with a lawyer who can explain the key terms you need for your bank guarantee and how to ask your landlord to return your guarantee. If you have any questions, contact LegalVision’s sale of business and purchase lawyers on 1300 544 755 or fill out the form on this page.

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