Bank Guarantees - a quick guide.

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 tenancy. 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?

1. 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.
2. Make sure that the parties are correctly named along with their address and Australian Company Number. 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.
3. Make sure that the sum payable is correct and if possible quote a gst inclusive figure in Australian dollars.
4. 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.
5. Presentation of the guarantee cannot be conditional such as consent from the lessee or other hurdle being firstly required.
6. 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.
7. 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 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.

Remember 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.