Bank guarantees are one of the most common features in leases these days. Landlords are increasingly turning to bank guarantees as an effective security to ensure tenants comply with their obligations under the lease. However, care must be taken to ensure the bank guarantee is effective and cannot be challenged by the tenant or the bank upon its presentation by the landlord in the event of default by the tenant.

We recommend the following requirements are complied with to ensure that bank guarantees are correct and to reduce a landlord's risk:

  • Australian Trading Bank – a bank guarantee should be from an Australian Trading Bank with an Australian Trading Licence. Otherwise you will have trouble claiming on a bank guarantee given by an overseas bank with no offices in Australia.
  • The Favouree – a bank guarantee should clearly print the full name of the landlord. The ACN for corporate landlords should also be inserted.
  • Assignable – the bank guarantee should be assignable if at all possible to allow the bank guarantee to be transferred to a purchaser of the freehold.
  • The Customer – the person on whose behalf the bank guarantee is issued must be clearly printed and identified. This should be the tenant under the lease.
  • Expiry Date – preferably, a bank guarantee should have no expiry date. Some banks have recently changed their practices and require an expiry date to be inserted in bank guarantees. If this is the case, then we recommend that the expiry date of the bank guarantee be as long as possible after the expiry date of the lease. This should hopefully cover any periods of make good and redecoration of the premises by the tenant, any holding over periods and the like.
  • Description – the purpose of the bank guarantee must be clearly expressed. A bank guarantee given by the tenant to the landlord should always cover all the tenant's obligations in respect of the premises (which should be clearly described) and ideally, as security for the obligations under any associated car park licence or incentive document.
  • Guaranteed Amount – the correct amount (both in words and numbers) should be clearly printed.
  • A bank guarantee should provide an 'unconditional undertaking' by the issuing bank to pay the guaranteed amount in the bank guarantee to the landlord if demanded. It should not be conditional.

We recommend that you have us review the terms of any bank guarantee prior to accepting it to avoid problems with making a claim under it.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.