Typically, a tenant’s bank guarantee is drawn in favour of the landlord pursuant to the lease, and it is the landlord who demands payment under the bank guarantee in circumstances of tenant default.
Where a property is transferred to a new owner, that party sometimes has difficulty obtaining a bank guarantee from the tenant in favour of the new owner, or in some circumstances may overlook the need to get a bank guarantee in its favour. In such circumstances the new owner will retain the bank guarantee drawn in favour of the previous owner.
The contract for sale of a tenanted property often includes a provision requiring the seller to claim on the bank guarantee (where a tenant is in default) for the benefit of the new owner where a bank guarantee in favour of the new owner has not been provided after settlement of the sale.
Accordingly, tenants may receive notice of claims being made on their bank guarantee by a party who is no longer the owner/landlord and for a breach that occurred post the date of transfer by the previous owner.
Bank guarantees are generally by their nature drafted unconditionally and do not require or allow the bank to look behind the claim so the bank would likely pay the claim out to the former owner without query.
It may be open to a tenant to argue in such cases that, depending on the terms of the lease, the former owner has no entitlement to claim on the bank guarantee and in doing so is in breach of a negative stipulation in the lease (ie not to call upon the bank guarantee) and possibly acting in breach of relevant consumer law.
The Federal Court is to consider this issue in the matter of Sensis Pty Ltd v Bivami Pty Ltd.
In the meantime, it remains advisable for landlords to ensure bank guarantees are drawn in their favour to avoid this possible argument, and for tenants on the other hand to seek advice if a bank guarantee has been or is to be claimed upon by a party for a loss in fact suffered by another party, for example, the new owner.
Please contact us if you require any advice on, or have any queries in relation to, lease securities and their enforcement.