Calling on a Bank Guarantee
Posted on April 26, 2013
A recent Victorian decision has further clarified when a Landlord can call on a bank guarantee - and it’s a good news story for Landlords.
- A lease of a commercial property had come to an end.
- A dispute arose as to whether the Tenant had properly made-good the premises and whether they were liable to pay additional rent for holding over.
- A resolution was not reached and the matter subsequently progressed to Court for trial.
- In the interim, and before trial, the Landlord called on the bank guarantee provided by the Tenant for a sum in excess of $0.5M.
- The Tenant sought an injunction to restrain the Landlord from using the bank guarantee cash until the trial was finalised.
- The Court rejected the Tenant’s application and allowed the Landlord to use the cash from the bank guarantee prior to resolution of the trial.
- The Court referred to prior cases providing that a bank guarantee will not be frustrated unless the Landlord has:
- acted fraudulently;
- acted unconscionably under Consumer Law; or
- breached a contractual promise not to draw-down on the bank guarantee.
- In this case, the Landlord was not acting fraudulently, unconscionably and was not restricted by the lease or by the bank guarantee as to when it could draw-down on the bank guarantee.
- As such, the Court allowed the Landlord to use the cash obtained from the calling of the bank guarantee.
Lessons
Even if a dispute exists between the Landlord and Tenant, the Landlord is still able to call on the bank guarantee.
When negotiating a lease, agents should ensure the agreement to lease contains no restrictions on the Landlord’s ability to use the bank guarantee.
When collecting the bank guarantee, it should be reviewed carefully to ensure it has no expiry date and contains no restrictions on the Landlord’s ability to call on it.