March 2004

Commercial / Retail Leases - Bank Guarantees

Bank Guarantees are one of the most common features of retail and commercial leases. For good reason, as they provide landlords with effective security against the tenant defaulting under the lease.

But how closely do you as a landlord check the contents of that slim piece of paper? Do you take careful note of where it is stored/filed?

There is a tendency amongst landlords to regard physical possession as the end of the story and to file away the Bank Guarantee until it is required because of a breach or it is returned to the tenant at the expiration of the lease.

All too often a lawyer instructed to act against a defaulting tenant is handed a Bank Guarantee which is no longer current or valid or the lawyer is advised that the landlord cannot locate the Bank Guarantee and is not sure whether it was actually provided and/or to whom.

A lost or expired Bank Guarantee can be extremely difficult to obtain from a tenant who is already in occupation and not otherwise in breach of the lease.

When dealing with Bank Guarantees the following should be considered:

Australian Trading Bank

A Bank Guarantee should be from an Australian Trading Bank. That is a bank with an Australian banking licence.

Many foreign banks have Australian banking licences and these fall within the description of Australian Trading Banks.

However, the format of Bank Guarantees for many of the overseas banks, is often quite different from those provided by Australian banks and they should be carefully reviewed.

Expiry Date

Ideally, the Bank Guarantee should not have an expiry date. Most banks will comply with this requirement.

If the tenant's bank insists on an expiry date, this should be a minimum of 3 months from the expiry date of the lease. See point 4, Renewal of Lease, on this issue.

This will ensure that if the tenant breaches the lease, such as failing to redecorate/reinstate the premises following the expiry or simply disappears, you will still have a valid Bank Guarantee to enforce against this breach.

Many American banks will only issue a Bank Guarantee for a maximum period of 1 year. This is often a problem when the tenant is a local subsidiary of a US corporation. In such circumstances you may consider reinforcing the Bank Guarantee with a guarantee from the US parent company.

In favour of the landlord

A Bank Guarantee should state clearly that it is in favour of the landlord. You should check that the landlord's name is correct.

Description of Premises

A Bank Guarantee should clearly and correctly describe the premises being leased. This should include the suite/floor number and the street address of the building.

Amount

A Bank Guarantee should clearly and correctly state the amount being guaranteed.

If the tenant is reimbursing you for GST on rental and other payments under the lease, the amount guaranteed should include the GST reimbursement.

For example, if the Bank Guarantee is for 2 months rent and this is equivalent to $30,000.00 and the tenant is reimbursing the landlord for GST, the guaranteed amount should be $33,000.00 so that your liability for GST is also covered.

Possession of the Premises

A tenant should not be given possession of the premises until a Bank Guarantee is provided, reviewed by a lawyer and found to be correct. Most banks can issue a Bank Guarantee within approximately 48 hours.

Rent Reviews

If the lease provides for the Bank Guarantee to increase on each rent review, make sure that you enforce this provision.

Include a request for the new Bank Guarantee and reference to the relevant clause of the lease in the notice to the tenant advising of the new rent.

Renewal of Lease

On the exercise of an option by a tenant, or the granting of a new lease to an existing tenant, remember that you will need a new Bank Guarantee from that tenant.

The Bank Guarantee in existence may have expired or may no longer be for the correct amount if there has been a rent review on exercise of option.

The existing Bank Guarantee should be physically exchanged for the new Bank Guarantee. Otherwise you will be left without security for the lease.

Physical Location

Decide between yourself, your lawyer and managing agent who is to have physical possession of the original Bank Guarantee.

Make sure that all involved parties know who has the original. If you have the original, your lawyer and managing agent should have copies.

Ideally, Bank Guarantees should be kept with the relevant lease for ease of reference and use if required.

Leasing Advice

Leasing agents should clearly set out the requirements for the Bank Guarantee in their leasing advice so that the tenant is aware at an early stage of what is required.

Audit

It is worth undertaking an audit of all your leases at regular intervals to check if the Bank Guarantees held are up to date and still valid.

It is worth noting that banks usually have a standard form of Bank Guarantee and are often extremely reluctant to change them.

If a proposed Bank Guarantee does not comply with the above points and the relevant bank will not agree to an amendment, it may be preferable to agree to an alternative form of security such as a security deposit.

Author: Hugh Halliday