Bank Guarantees are a popular and convenient alternative to holding a security deposit during a lease term for many landlords. However, care must be taken to ensure the Bank Guarantee is effective security and not liable to challenge by either the bank or the tenant upon presentation by the landlord in the event of default. We recommend that landlords ensure their tenants strictly comply with the following requirements for Bank Guarantees to minimise this risk. These include:

  • the accurate identification of the landlord as favouree (eg include the ACN for a company);
  • including the full name of the tenant under the Lease (as opposed to merely the obligation to pay rent);
  • specifying the complete and accurate name of the tenant and tenancy (especially where the customer of the bank for whom the bank guarantee is issued is not the tenant). There is authority that the validity of the Bank Guarantee is in doubt unless the Bank Guarantee directly refers to the contract, lease or other document or transaction in question;
  • that it be issued by an Australian Bank - a foreign bank issued Bank Guarantee may raise foreign jurisdictional issues if the Bank Guarantee is presented by the landlord for payment; and
  • stating that no expiry date applies - some banks are resisting this and now require an expiry date to be specified.

In a situation where a bank simply refuses to issue the Bank Guarantee without an expiry date, we recommend that if an expiry date is agreed to that it be as long as possible after the expiry date of the lease (at least 6 months) or (if applicable) at least 6 months after the expiry date of the final further (option) term. This additional period would cover any holding over or make good costs that the Lessor may incur following the tenant's departure from the premises after the lease expiry. It is extremely important where a lease contains an option to renew that either the Bank Guarantee contain no expiry date or landlords ensure that a condition of the valid exercise of the option to renew includes the provision of a replacement bank guarantee for the renewed lease term.

© HopgoodGanim Lawyers



Australia's Best Value Professional Services Firm - 2005 and 2006 BRW-St.George Client Choice Awards

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.