Bank Guarantees for Retail and Commercial Leases

A landlord of a retail or commercial property often requires a tenant to provide a bank guarantee as security in case the tenant defaults under the Lease. Many bank guarantees that are offered to landlords are inadequately prepared by the bank and do not offer effective protection. To avoid a bank guarantee being rejected by a landlord or to ensure that it is one capable of being called on by a landlord the following should be considered:
1. Australian Bank The bank guarantee should be issued by an Australian bank with an Australian trading licence. This aids in the landlord’s ability to quickly and efficiently make a claim and to receive funds.
2. Unconditional It should provide and unconditional undertaking by the bank to pay a certain amount if a demand is made by the landlord.
3. Favouree It should correctly describe the landlord as “the favouree” i.e. the one to receive the benefit of the bank’s undertaking.
4. Customer It should state precisely the party for whom it is being issued (“the customer”) as the tenant. If the bank guarantee is sought by a third party connected to the tenant then it should mention the customer’s name followed by “at the request of [name of the tenant]”.
5. Description of Leased Premises The leased premises should be correctly described in full.
6. Purpose It must set out that the purpose of the bank guarantee is to secure the tenant’s obligations under the Lease with descriptions of the address of the leased premises and the parties including their names.
7. Amount It should correctly state the amount of the bank guarantee as required by the Lease which would normally comprise a certain number of months’ rent and proportionate share of any outgoings plus GST.
8. Expiry Date The expiry date of the bank guarantee should be at least 3 months after the expiry date of the Lease to give the landlord enough time to determine, upon the tenant vacating the premises, whether there have been any breaches of the Lease such as failure to make good the premises, to obtain any quotes for repairs, for the work to be carried out, for final invoices to be received and for a written claim to be made on the bank.

May 2017