How Bank Guarantees Work for Commercial Properties in Australia
Bank guarantees are a common form of security used in commercial property transactions in Australia. They provide a level of protection for landlords in the event that a tenant defaults on their lease obligations. They also give a form of security for tenants as typically they are interchangeable for cash bonds that a landlord would normally hold.
In this blog post, we will explain how bank guarantees work for commercial properties in Australia, and provide some tips on how to choose the right bank guarantee for your needs. This information should be useful for our clients and customers seeking to lease commercial property in Brisbane and Gold Coast.
What is a bank guarantee?
A bank guarantee is a written promise from a bank to pay a certain amount of money to a designated party, if certain conditions are met.
In the context of commercial property, a bank guarantee is typically used to secure a tenant’s lease obligations. This means that if the tenant defaults on their rent or other lease obligations, the landlord can call on the bank guarantee to recover the outstanding amount.
How do bank guarantees work?
Bank guarantees are typically three-party agreements, involving the landlord, the tenant, and the bank.
The landlord is the beneficiary of the bank guarantee, meaning that they are the party who can call on the guarantee if the tenant defaults.
The tenant is the applicant of the bank guarantee, meaning that they are the party who requests the guarantee from the bank.
The bank is the issuer of the bank guarantee, meaning that they are the party who promises to pay the landlord if the tenant defaults.
Types of bank guarantees
There are two main types of bank guarantees used in commercial property transactions:
- Conditional bank guarantees: These guarantees are only payable if the tenant defaults on their lease obligations and the landlord meets certain conditions, such as providing evidence of the tenant’s default.
- Unconditional bank guarantees: These guarantees are payable on demand, regardless of whether the tenant has defaulted on their lease obligations or not.
Unconditional bank guarantees are generally preferred by landlords, as they provide a higher level of protection. However, they can be more expensive for tenants.
Choosing the right bank guarantee
When choosing a bank guarantee, it is important to consider the following factors:
- The type of bank guarantee: Whether you need a conditional or unconditional bank guarantee will depend on your individual circumstances.
- The amount of the guarantee: The amount of the guarantee should be sufficient to cover the landlord’s losses in the event of a tenant default.
- The cost of the guarantee: Bank guarantees can be expensive, so it is important to compare quotes from different banks.
- The terms of the guarantee: It is important to read the terms of the bank guarantee carefully before signing it. This will ensure that you understand your obligations and the landlord’s rights.
How to obtain a bank guarantee
To obtain a bank guarantee, you will need to apply to your bank. The bank will assess your creditworthiness and ability to repay the guarantee if it is called upon.
If your application is successful, the bank will issue a bank guarantee on your behalf. You will then need to provide the bank guarantee to the landlord.
The process can usually take circa business 10 days or longer, so we encourage tenants to arrange guarantees as possible after lease execution to ensure it is in place prior to the expected hand over date. Typically landlords will not provide access to commercial properties without a cash bond or a bank guarantee in place.
How a landlord can call upon a bank guarantee
To call upon a bank guarantee, the landlord must provide the bank with a written demand. The demand must state the amount of the guarantee that the landlord is claiming, and the reasons for the claim.
The landlord must also provide the bank with any supporting documentation, such as evidence of the tenant’s default on their lease obligations.
Once the landlord has provided the bank with a written demand and supporting documentation, the bank will investigate the claim. If the claim is valid, the bank will pay the landlord the amount of the guarantee.
How a tenant can extinguish a bank guarantee at the end of the lease
To extinguish a bank guarantee at the end of the lease, the tenant must meet all of their lease obligations. This includes paying all rent and other charges on time, and returning the property in good condition.
Once the tenant has met all of their lease obligations, they should request a written release from the landlord. The release should state that the tenant has met all of their lease obligations and that the bank guarantee is no longer required.
The tenant should then provide the bank with a copy of the release. The bank will then cancel the bank guarantee.
Additional tips for landlords and tenants
Here are a few additional tips for landlords and tenants when dealing with bank guarantees:
- Landlords should keep a copy of the bank guarantee in a safe place. This will ensure that they have access to the guarantee if they need to call upon it.
- Tenants should check the terms of the bank guarantee carefully before signing it. This will ensure that they understand their obligations and the landlord’s rights.
- If a tenant is having difficulty meeting their lease obligations, they should contact the landlord or property manager as soon as possible. The landlord may be willing to work with the tenant to avoid a default.
Bank guarantees can be a valuable tool for both landlords and tenants in commercial property transactions. By following the tips above, you can help to ensure that the bank guarantee process is smooth and efficient.
Conclusion
Bank guarantees can be a valuable tool for both landlords and tenants in commercial property transactions. They provide a level of protection for landlords in the event of a tenant default, and they can give tenants peace of mind knowing that their lease obligations are secured.
For further information on leasing or property management, you are welcome to contact our expert commercial real estate agents and property managers.
