Bank guarantees are often used by tenants to provide landlords under commercial or retail leases with security about the performance of their obligations. Typically, the terms of the bank guarantee will provide for the landlord to have immediate access to the guaranteed funds without having to wait for a Court decision to confirm that the lessee has breached the lease.
Joanne Chang, a lawyer in our Property & Projects team, provides a warning to landlords about a possible pitfall.
RECENT CHANGES TO THE LAW
A recent case casts some doubt on the proposition that landlords have immediate access to guaranteed funds: it all depends on how your lease and bank guarantee is worded.
The Court considered whether a landlord could demand payment under a bank guarantee based on a claim that the tenant had breached the lease, or whether it was only entitled to do so once it was proven the tenant had breached the lease. The Court found the bank guarantee was drafted in a way to suggest that if the tenant was not actually in breach of the lease, the landlord had no right to call on the bank guarantee. An injunction was granted to stop the landlord from calling on the bank guarantee.
The outcome is clear: landlords need to ensure that leases and bank guarantees are drafted to provide them with immediate access to the bank guarantees without having to prove that an actual breach of the lease has occurred.
WHAT SHOULD LANDLORDS DO?
As a landlord, you should ensure that:
- your lease allows you to approve the bank guarantee, so that you can make sure it is in a form acceptable to you;
- the lease allows you to call on the bank guarantee where you believe you have acted in good faith and consider that the tenant has breached the lease;
- you are cautious in assessing your right to call on the bank;
- guarantees before doing so to avoid any potential litigation; and
- you review all current leases and bank guarantees to ensure that you are not unduly restricted from calling up under the bank guarantee. While it may be difficult to amend the terms now, you may be able to do so when the lease falls for renewal.