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Commercial leasing - Doubt upon what it really means to have 'unconditional' bank guarantee

Newsletter 09 September 2014

A recent decision of the Equity Division of the Supreme Court of New South Wales has cast doubt upon what it really means to have an ‘unconditional’ bank guarantee. As this case impacts current and future commercial agreements where such a guarantee has been or will be given, it is advisable that landlords and tenants carefully review their leasing agreements with reference to the Court’s findings.

The Decision

Universal Publishers Pty Ltd v Australian Executor Trustees Ltd [2013] NSWSC 2021 concerned a commercial leasing dispute in which Australian Executor Trustees Ltd (the Landlord) sought to call upon the bank guarantee as a result of alleged breaches of the lease by Universal Publishers Pty Ltd (the Tenant). The Landlord and Tenant entered into a ten year commercial lease agreement for land in Macquarie Park, New South Wales. In November 2012, three years after the lease expired, the Landlord commenced proceedings against that Tenant, alleging that the Tenant had failed to:

  • reinstate and remediate the property (having failed to remove an underground storage tank); and
  • yield up possession of the property in a state duly maintained and repaired as provided for in the lease.

The Landlord sought 2.7 million dollars in damages and interest. It alleged that the amount comprised the cost of either remedying the breaches or the loss of value in the property if the breaches were not remedied, as well as for lost rent and contributions to outgoings. Before the substantive proceedings were heard, the Landlord sought to call upon the bank guarantee; the Tenant opposed this and brought an application for an injunction to restrain the Landlord from doing so. The Court granted a temporary injunction until the application was heard.

Even though the guarantee was unconditional, the Court ultimately granted the injunction. The Court was not persuaded by the argument of the Landlord that, by reference to the terms of the lease, it was enough that its claim was made in good faith.

Instead, the Court found that the determination will fall upon a consideration of the terms of the lease and the breach in question. Though it is not necessary that there is an actual, indisputable breach, equally, the Court found that there must be something more than simply a good faith claim. The Court defined that ‘middle ground’ to be circumstances in which a tenant establishes that there is a ‘serious question to be tried as to whether the lessee is in breach’. In applying that definition, while the Court did not make a definitive finding as to whether there had been a breach, the Court was satisfied that there was a serious question to be tried in respect of the allegations that the Tenant had failed to reinstate and remediate the property. As such, the injunction was allowed.

In light of the decision of Universal Publishers, what steps should landlords and tenants take?

Landlords should review their precedent lease terms and consider if they should be amended to allow a claim to be made where the Landlord is acting in good faith, even if the tenant has notified of a dispute.

Lynette Reynolds, Partner

Newsletter 09 September 2014
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