Bank guarantees are often used by tenants to provide landlords
or principals under commercial or retail leases with security to
perform its obligations. Bank guarantees usually contain terms that
are standard amongst commercial leases and contracts and have been
known to provide landlords and principals with immediate access to
guaranteed funds without having to wait for a decision from a court
to confirm that the lessee has breached the lease.
RECENT CHANGES TO THE LAW
A recent decision, Universal Publishers Pty Ltd v Australian
Executor Trustees Ltd  NSWSC 2021 casts doubt on the
proposition that landlords and principals have immediate access to
guaranteed funds and restricts the right of landlords and
principals to call on bank guarantees solely relying on a good
faith claim. This decision places the burden on landlords to ensure
that property or lease agreements are drafted to provide landlords
or principals with immediate access to the bank guarantees without
having to prove that an actual breach of the lease has
The court determined that the principal question is whether the
landlord is entitled to make a demand on the bank guarantee based
on a claim that the tenant is in breach of the lease, or whether it
is only entitled to do so if in fact the tenant has breached the
In this case, the lease contained the following standard clause
that provided an unconditional undertaking or guarantee from an
Australian bank in favour of the landlord:
19.4 In the event that the lessee:
19.4.1 defaults in the payment of Rent or in the performance or
compliance of any other obligations under this Lease;
19.4.2 breaches any other obligation, term,
condition or covenant under this Lease,
The Lessor is hereby authorised to demand that the
guaranteeing bank pay to the Lessor such amount that (in the
reasonable opinion of the Lessor) may be due to the Lessor as a
result of such default, breach or non-observance by the Lessee
or termination of the Lease pursuant to it.
However, upon reviewing the clause, the court held that the
clause was drafted in a way to suggest that if the tenant was not
actually in breach of the lease, the landlord had no right to call
on the bank guarantee. The court further held that there was a
serious question to be tried as to whether the tenant was in breach
of the lease and that damages were unlikely to be an adequate
remedy if it was ultimately held that the landlord was not entitled
to call on the bank guarantee.
Accordingly, an injunction was granted to stop the landlord from
its entitlement to the bank guarantee.
WHAT SHOULD LANDLORDS DO?
To avoid future disputes, landlords and principals should
ensure that all relevant property and lease agreements allow them
to call on bank guarantees where the landlord believes that they
have acted in good faith and that the tenant has breached the
lease. Furthermore, the agreements should also ensure that the bank
guarantee is in a form that is acceptable to and first approved by
the landlord or principal. Our firm may assist with reviewing your
agreements and bank guarantees to ensure that they are
appropriately drafted for this purpose.
Often, legal advice is given to advise that there is a genuine
right to call on bank guarantees without an actual breach. However,
we note that the decision has not yet been overturned and therefore
landlords and principals should continue to exercise caution to
ensure that they are entitled to call on the bank guarantees before
making such demand to avoid any potential litigation costs.
Landlords and principals should review all current property and
lease agreements and consider replacing or amending any relevant
document to ensure that a claim may be made where the landlord is
acting in good faith, even if the tenant has notified of a
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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