A bank guarantee is a bankers undertaking to unconditionally pay the beneficiary the sum stated on the guarantee. This is similar to a bank cheque and is held by the landlord often for the duration of the Lease.
If you are about to replace a guarantee or have just leased a property and the Lease demands that one be provided, what do you look for?
- Read the Lease. With Victorian Leases in common use, clause 16 of the 2016 R.E.I.V. Lease outlines the requirements of the guarantee. 16.2 (a) provides that a guarantee must have no expiry date and 16.11 provides that it must be provided before handover. The L.I.V. 2014 Lease deals with guarantees in clause 13.
- Make sure that the parties are correctly named along with their address and Australian Company Number. This is critical as the bank guarantee will likely be unenforceable if there is even the tiniest of spelling mistakes.
- The guarantee must be drawn in favour of the Landlord. However, if possible try to avoid the landlord being a trust or ownership structure that may require substantial documentation to prove entitlement if the time comes to visit the bank and draw down on the guarantee.
- Make sure that the sum payable is correct and if possible quote a GST inclusive figure in Australian dollars.
- Ideally it should describe the bank guarantee purpose as: “for all obligations of (INSERT FULL TENANT DETAILS as per 2 above) under the Lease for the premises located at (INSERT FULL TENANCY ADDRESS) and any associated car parking licence and the obligations of the Tenant’s guarantors.”
- There should preferably be no expiry date. If a date has to be inserted, then aim for a date which is at least 3 months after the date following the expiry of the initial term and options combined.
- The guarantee must be unconditional and irrevocable.
- If the bank listed on the guarantee is not a local trading bank then you should check for a listing with the office of the Australian Prudential Regulator to establish that the bank holds an Australian banking licence. (Thank you to Geoff Kliger from KCL Law for this suggestion.)
- It is recommended that the Bank Guarantee provides that it can be drawn against at an office/branch of the bank located in Melbourne.
- If possible, try to obtain a guarantee with a stamp or signature in a colour other than with black ink as the original can easily be confused with a copy and can be very difficult to verify years later. If you receive an electronic guarantee it is advisable you contact the bank who issued it directly by telephone and verify that they did indeed issue the guarantee (to ensure legitimacy).
If possible it is recommended that you request to be provided with a draft copy of the guarantee so you can ensure it meets all the above requirements before it is issued. You will likely experience significant delays if the guarantee is incorrect and needs to be reissued.
Remember, only original Bank Guarantees can be drawn upon, a copy is unenforceable, so make sure you hold the original and store it somewhere safe.
If in doubt, always read the respective clauses in both leases and any special conditions contained therein. If a guarantee is not provided before handover then insist on a cash bond to be exchanged upon production of an acceptable guarantee or simply do not hand over keys to the premises.
It is also worth noting that a bank guarantee generally has the added bonus of not being an asset of the lessee. In the event of the appointment of a tenant administrator, receiver or liquidator, a cash bond may have to be returned for distribution to creditors whereas a bank guarantee is beyond their reach.
Written by Eugene Khoo
Nine years after Eugene commenced his career in property management, he remains deeply committed to the industry. With his recent involvement in owners corporation management and a Diploma in Conveyancing, he can offer the most up to date theoretical and practical industry knowledge to assist his client in all aspects from the purchase to the management of their investments.