When is a Bank Guarantee NOT Guaranteed?

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YOUR TENANT’S OBLIGATION to pay rent, care for the premises and abide by the provisions of the lease is usually secured by your right (as the landlord) to terminate the lease and recover possession.

In reality, this does little to remedy the financial loss suffered by a landlord, as a result of a breach by the tenant.

Therefore, a bank guarantee is a common method of providing additional security to landlords — as it enables the landlord to draw on the bank guarantee to remedy its loss, in the event of a default by the tenant.

However, a recent decision handed down by the Supreme Court of New South Wales places some doubt over the use of a bank guarantee in circumstances, where your tenant denies a breach has occurred.

Whether a landlord is entitled to draw on a bank guarantee depends entirely on the wording of the lease.

Where do you stand?

In the absence of an express term requiring an actual breach to have occurred … the current position in Victoria is that the landlord will be able to call on the bank guarantee if the landlord claims in good faith (ie: not fraudulently), there has been a breach [see Otter Group Pty Ltd v Wylaars & Anor (2013) VSC 98].

In other words: A landlord does not need to wait for a Court to decide whether the tenant has breached the lease, before accessing the bank guarantee.

However, the recent New South Wales Supreme Court case of Universal Publishers Pty Ltd v Australian Executor Trustees Ltd [2013] has cast a shadow of uncertainty over the effectiveness of bank guarantees.

Details of the Decision

In the Universal Publishers case, Australian Executor Trustees Ltd denied that they were in breach of their lease. And sought an injunction against Universal Publishers Pty Ltd calling on the bank guarantee provided for under the lease.

The Court held that a landlord’s entitlement to call on a bank guarantee rested solely on the wording and construction of the relevant clause (or clauses) in the lease.

If a lease provides that the landlord is entitled to call on the bank guarantee where a landlord, whilst acting in good faith, declares that the tenant is in breach, then an injunction will not be granted.

However, where a lease does not include this wording, the landlord may be prevented from accessing the bank guarantee — until it is objectively determined by a Court that the tenant is in breach of the lease.

In practical terms …

As a Bank is only liable for the obligations which it has undertaken to guarantee under the terms of the bank guarantee … it is imperative that the wording of the bank guarantee covers all the tenant’s obligations under the lease (including rent increases) throughout the entire period of the lease, and any holding over periods.

Bottom Line: Landlords should also ensure that in light of the recent Universal Publishers decision, leases in all jurisdictions are drafted in a way which entitles the landlord to draw on the bank guarantee, whenever the landlord believes (in good faith) that a breach has occurred.

Disclaimer: If you think a similar situation may apply to you, then you should contact us for detailed legal advice relating to the particular facts and circumstances of your property or lease agreement. This article is not intended to provide such detailed and specific advice and you should not act on the basis of any matter contained in this article without first obtaining more comprehensive professional advice.

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