When can a landlord draw down on a bank guarantee?

Parties providing bank guarantees and those looking to draw down on them should get legal advice beforehand.

In a recent case, the tenant of industrial premises provided the landlord with a bank guarantee at the commencement of the lease securing their obligations under the lease. The lease expired and the tenant vacated the premises, leaving some of their fixtures, fittings and equipment behind. A dispute arose between the parties as to whether the tenant had returned the premises as required under the lease.

While the dispute was being mediated, the landlord drew down the proceeds of the bank guarantee to effect repairs to the premises. The tenant demanded that the funds be returned to the bank, and when the landlord refused to do so, the tenant commenced proceedings for a temporary injunction restraining the landlord from dealing with the funds until the dispute had been resolved.

The Court did not grant the injunction and ruled that the landlord did have the right to draw down on the bank guarantee, without having to tell the tenant beforehand, and without having to wait for the dispute to be mediated.

While every case will turn on the terms of the lease and its own facts, this case does highlight the need for parties providing bank guarantees and those looking to draw down on them to get appropriate legal advice beforehand.

If anyone would like further advice on this issue or leases generally please contact our leasing law specialist, Zasco van Rooyen.