When can landlords call upon bank guarantees provided by the tenant? The answer is not as simple as you think!

Whether you are a landlord or a tenant, not ensuring that your rights and interests are protected under a lease, can have serious consequences.

The Situation

• A landlord leases industrial premises to a tenant. 
• The tenant has given a bank guarantee to the landlord to secure the performance of its obligations under the lease. 
• The bank guarantee is irrevocable, in the landlord’s favour and has no expiry date. 
• The lease expires and the tenant vacates the premises, but in vacating the premises, the tenant does not remove its fuel storage tank from the premises and does not reinstate and remediate the premises as required by the lease. 
• The landlord asks the tenant to comply with the lease, but the tenant denies having breached the lease. 

Can the landlord call upon the bank guarantee provided by the tenant to apply towards the cost of reinstating and remediating the premises?  Not necessarily.

The Decision

The Supreme Court of New South Wales considered this question in Universal Publishers Pty Ltd v Australian Executor Trustees Limited [2013] NSWSC2021.

The upshot of the Court’s decision is that the answer depends upon the terms of the lease.  If the lease provides that the landlord can call upon the bank guarantee for an actual breach of the lease or an actual default by the tenant, then the landlord cannot call upon the bank guarantee in cases of a claimed or alleged breach or default.

If there is a dispute between the landlord and the tenant as to whether the tenant has breached the lease and if the landlord calls upon the bank guarantee, the landlord will be liable to pay damages to the tenant if it is ultimately determined that the landlord was not entitled to call on the bank guarantee.

In Universal Publishers, the Court decided that damages would not be an adequate remedy for the tenant if the landlord called upon the bank guarantee when it was not entitled to do so.  For this reason, the Court restrained the landlord from calling upon the bank guarantee and permitted an injunction, which the tenant had already obtained, to continue to prevent the landlord from calling upon the bank guarantee.

Unless a lease gives the landlord the right to call upon a bank guarantee in cases where the landlord claims an entitlement in good faith to do so, it is a serious question for the Court to determine whether a landlord can call upon a bank guarantee.  Landlords, which call upon bank guarantees lightly, face the risk of orders in damages being made against them.

If you have any questions regarding this article, please contact David Creais, Andrew Grima or Melissa Potter.

Author: Peter Barakate