Bank guarantees are often used by tenants to provide
landlords under commercial or retail leases with security about the
performance of their obligations. Typically, the terms of the bank
guarantee will provide for the landlord to have immediate access to
the guaranteed funds without having to wait for a Court decision to
confirm that the lessee has breached the lease. Joanne Chang, a
lawyer in our Property & Projects team, provides a warning to
landlords about a possible pitfall.
RECENT CHANGES TO THE LAW
A recent case Universal Publishers Pty Ltd v Australian Executor
Trustees Ltd  NSWSC 2021 casts some doubt on the proposition
that landlords have immediate access to guaranteed funds: it all
depends on how your lease and bank guarantee is worded.
The Court considered whether a landlord could demand payment
under a bank guarantee based on a claim that the tenant had
breached the lease, or whether it was only entitled to do so once
it was proven the tenant had breached the lease. The Court found
the bank guarantee 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. An injunction was granted to
stop the landlord from calling on the bank guarantee.
The outcome is clear: landlords need to ensure that leases and
bank guarantees are drafted to provide them with immediate access
to the bank guarantees without having to prove that an actual
breach of the lease has occurred.
WHAT SHOULD LANDLORDS DO?
As a landlord, you should ensure that:
Your lease allows you to approve the bank guarantee, so that
you can make sure it is in a form acceptable to you
The lease allows you to call on the bank guarantee where you
believe you have acted in good faith and consider that the tenant
has breached the lease
You are cautious in assessing your right to call on the
Guarantees before doing so to avoid any potential litigation,
You review all current leases and bank guarantees to ensure
that you are not unduly restricted from calling up under the bank
guarantee. While it may be difficult to amend the terms now, you
may be able to do so
when the lease falls for renewal.
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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