Issue

Is a landlord entitled to call on a bank guarantee if they claim in good faith that there was a breach? Or, does there need to be an actual beach for the landlord to exercise their entitlement?

What happened

Universal Publishers Pty Ltd (the tenant) leased land in Macquarie Park, New South Wales from Australian Executor Trustees Ltd (the landlord). The original dispute between the tenant and the landlord related to an alleged breach of lease. The landlord claimed that the tenant had failed to remove an underground fuel storage tank and failed to take the necessary action to clean up the contamination and repair or rebuild the property. The landlord sued the tenant for breaching the lease and the tenant proceeded to defend the action.

Before the dispute was resolved, the landlord informed the tenant that they intended to call on the bank guarantee to cover their losses caused by the alleged breach. The tenant successfully obtained an injunction to stop the landlord from taking that action, which the landlord challenged.

The Supreme Court of New South Wales interpreted the relevant clause of the contract to require an actual breach before the landlord could call on the bank guarantee. The Court said that an actual breach does not mean that there is no doubt that there was a breach but, rather, that there are genuine grounds for a dispute about whether there was a breach. The Court decided in this case that the landlord could not call on the bank guarantee because the breach could be genuinely disputed, which meant that there was not an "actual" breach.

In contrast, in Otter Group Pty Ltd v Wylaars & Anor [2013] VSC 98 the Supreme Court of Victoria decided that a landlord can call upon the bank guarantee unless they are acting fraudulently, in breach of a contractual agreement not to call upon the bank guarantee, or in breach of the Australian Consumer Law. In that case, there were genuine grounds for a dispute as to whether there was a breach but not as to whether the landlord could call upon the bank guarantee, as the contract contained a provision allowing the landlord to take that action while the relevant dispute was resolved.

Practical tip

As many bank headquarters are based in New South Wales, this decision may have practical implications for commercial and retail leases in Victoria. Accordingly, landlords need to ensure that their lease does not require an actual breach in order to exercise their entitlement to call on the bank guarantee. This would give the landlord a right to call on the bank guarantee if they genuinely believe that there was a breach, even if the tenant challenges the existence of the breach. However, if a landlord calls upon the bank guarantee without any right to do so, they may become liable to the tenant for damages.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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