When entering into a commercial lease agreement, the Lessee (tenant) will generally be required to provide the Lessor (Landlord) with a Bank Guarantee as security which can be accessed should the Lessee fail to meet the obligations of the lease.
The general requirements for putting a bank guarantee in place are as follows:
- Be provided by the tenant entity under the lease
- It is a requisite that the entity on the Bank Guarantee reflects the same entity that is on the lease. The owner will then be able to draw down on the guarantee without question (if required) should the Tenant be in breach of their lease and is not able or willing to remedy the breach.
- Be in the amount agreeable as per the Signed Heads of Agreement
- The amount on the Bank Guarantee should reflect the amount that was agreed between the parties within the initial Offer to Lease (Heads of Agreement) document.
- Be drawn in favour of the Landlord
- A Bank Guarantee should clearly indicate that it is ‘in favour’ of the Landlord. The correct details will generally be provided by the Landlord’s Solicitor alongside the lease documents (at the time of issue).
- Describe the bank guarantee purpose
- As a guide this will generally to be along the lines of:
“The Bank Guarantee is used as security of all obligations of *Business Name & ACN/ABN* (as Lessee) under the lease and any other documents for the Lessee’s tenancy at Lease XX on the XX floor at XXXX”
- Be unconditional and irrevocable
- The Bank Guarantee cannot be withdrawn and must be in place for the entire period (of time) as agreed under the lease.
- Be issued by an Australian trading bank as approved by the Landlord
- A Bank Guarantee should be from an Australian Trading Bank- meaning a bank with an Australian Banking License.
- Many foreign banks have an Australian Banking Licence but don’t fall under this category.
- It should be noted that the format of Bank Guarantee for overseas banks often varies to those provided by Australian Banks, therefore requiring careful review. If in doubt, discuss with your solicitor on the matter.
- Be payable immediately upon presentation at the bank
- This point is somewhat self-explanatory as it needs to be valid by the time you’re executing the lease.
- Have No Expiry Date
- Some Landlords may request that there is no expiry date on the Bank Guarantee. This cover the Landlord if for example there is a failure by the Lessee to redecorate/make good on the premises occurs at lease expiry. The BG will still be current for the Landlord to draw down on. The market norm is generally to have a Bank Guarantee with a six (6) month or twelve (12) month expiry date beyond the end of the initial lease term. Regardless of the expiry date there is no benefit for the landlord in holding on to the Bank Guarantee if all of the obligations of the lease have been met at expiry and it should be promptly returned to the Lessee.
Approval of Bank Guarantee and delivery procedures:
A draft copy of the Bank Guarantee should be emailed to the Lessor’s lawyers for approval prior to asking your bank to issue a final copy.
It’s worth noting that if the Landlord needs to survey the tenancy to confirm the exact size the final Bank Guarantee cannot be provided until this has been completed. This would be relevant in the event that inter-tenancy walls are required to be built to create the tenancy.
Once the Lessor’s lawyers confirm they are happy with the draft the original Bank Guarantee can be sought and delivered. It is important to note that the electronic copy of the Bank Guarantee does not suffice, an original is required.
For any questions please contact the Caden team.