Prompt Law Australia | Contract Review & Commercial Law Firm
Can your landlord simply take your bank guarantee? In most cases the bank must pay the landlord on demand. A bank guarantee is an unconditional promise by your bank, so the bank does not call you first, does not ask for proof that you are in breach, and does not wait for your side of the story. The money is gone before the argument starts.
That does not mean the landlord is entitled to keep it. Whether the call was valid is decided between you and the landlord, by the terms of your lease and, for retail shops, by the Retail Leases Act 1994 (NSW). This guide explains when a landlord can call on a bank guarantee, whether you can stop it, what to do in the first 48 hours, and when the guarantee must be handed back.
Has your landlord threatened to call on your bank guarantee? Our commercial lease lawyers in Sydney can review your lease and the demand, and tell you where you stand before the bank pays out.
Feature | Bank guarantee | Cash security bond |
|---|---|---|
What it is | Your bank’s unconditional promise to pay the landlord on demand | Your own money, paid over as security |
Who holds it | The landlord holds the original document | Under a retail shop lease it must be lodged with the NSW Retail Bond Scheme |
How it is called on | The landlord presents a demand to the bank and the bank pays | The landlord must claim it under the scheme rules or by agreement |
Where your money sits | Usually locked in a term deposit or secured against property | Paid out of working capital at the start of the lease |
Do you get warning | Often not, unless your lease requires notice first | Usually, because a claim or your consent is needed |
When it comes back | Retail leases: within 2 months of you completing the obligations it secures | On agreement between the parties, or by order |
The guarantee is your bank’s promise, not your money sitting in a trust account. Once a compliant demand is presented, the bank pays. Your protection comes from the lease and the Retail Leases Act, not from the bank.
The answer is in your lease, not in the guarantee itself. The security clause sets out what the guarantee secures and what has to happen before the landlord can use it. Most commercial and retail leases allow a call where the tenant is in breach, and the usual triggers are rent arrears and unpaid outgoings, damage or unperformed make-good obligations at the end of the term, and the landlord’s losses after the lease is terminated early, such as rent for the period the premises sit empty. Some leases also allow a call for interest and the landlord’s legal costs.
Two points catch tenants out. First, the bank’s obligation is separate from the lease. If the guarantee is expressed as unconditional or payable on demand, the bank pays against a compliant demand and will not take instructions from you to refuse. Second, a landlord can call on a guarantee even where you genuinely dispute the amount. The call being effective at the bank does not make it correct as between you and the landlord, and it does not stop you from recovering the money later.
Three things decide whether a call was valid.
Read the clause word for word. Does the guarantee secure “all obligations under the lease”, or only rent? Must the landlord give you notice, or an opportunity to remedy the breach, before calling on it? Is there a cap on what can be drawn? A landlord who calls for an amount the clause does not cover, or who skips a notice step the lease requires, has breached the lease, and that is the basis of your claim to get the money back.
A demand asserts a breach. It does not prove one. Rent may have been withheld because the landlord failed to repair, outgoings may have been wrongly calculated, or a make-good claim may be inflated well beyond the cost of the works. If there is a genuine dispute about whether you owe the money at all, the landlord’s entitlement to keep the proceeds is exactly what a NCAT commercial lease dispute is there to decide.
Most lease guarantees are unconditional and payable on demand, which courts treat as the commercial equivalent of cash. The purpose is to decide who holds the money while the dispute is argued, and the landlord is meant to be the one holding it. A guarantee that is conditional, or that expires on a set date, changes the position, so check the expiry date too. An expired guarantee cannot be called on at all.
Sometimes, but it is difficult and it has to be fast. Australian courts are reluctant to interfere with unconditional security, because the whole point of the guarantee is that it pays out first and the dispute is sorted out afterwards. An injunction is generally sought against the landlord, restraining it from making the demand, rather than against the bank.
Courts have recognised a narrow set of circumstances where a call can be restrained: fraud by the party calling on the guarantee, unconscionable conduct, and a clear negative stipulation in the lease, meaning a term promising that the landlord will not call on the security except in defined circumstances. Outside those situations an application is likely to fail, and you will usually have to give an undertaking to pay the landlord’s damages if the injunction turns out to be wrong.
In practice the faster and cheaper routes are commercial ones: a written standstill while the amount is agreed, payment of the undisputed portion, or mediation. For retail leases, mediation through the NSW Small Business Commissioner is a required step before most disputes can be heard by NCAT, and it is often the point at which an inflated claim comes down.
What you do before the demand reaches the bank matters far more than anything you do afterwards:
Under section 16BA of the Retail Leases Act 1994 (NSW), a landlord who holds a bank guarantee for a retail shop lease must return the original to the tenant within 2 months after the tenant completes the obligations the guarantee secures. Failing to do so carries a maximum penalty of 50 penalty units, and the landlord is liable to compensate the tenant for loss caused by the delay, including the costs of cancelling a guarantee the landlord cannot return.
Two qualifications matter. The 2 month period does not run while the landlord’s entitlement to claim on the guarantee is before a court or the Tribunal, and a guarantee that has expired or been cancelled does not need to be returned. If your lease has ended, you have met your obligations and the landlord is still holding the guarantee, that delay is costing you: the term deposit behind it stays locked up and the bank’s fees keep running.
The situation: A retail tenant holds over after several difficult trading years. The landlord issues a letter of demand for $106,000 covering rent arrears, outgoings and make-good, and holds a bank guarantee for $62,000. The tenant’s instinct is to wait and hope the dispute goes away.
The approach: Deal with the guarantee first and the dispute second. Check the security clause and the expiry date, separate the part of the claim that is genuinely owed from the part that is not, and put a written position to the landlord quickly, proposing a standstill while the make-good figure is tested against an independent costing.
The point: Waiting is the worst available option, because the landlord can call on the guarantee at any time. Once it has been called, the matter becomes a recovery claim and the money is already with the landlord, which is why the first week matters so much.
Bank guarantee disputes are won or lost on the wording of one clause and on how quickly you move. The right advice in the first few days is what keeps your options open.
Our commercial lease lawyers help you by:
✓ 11+ years acting for Sydney landlords and tenants in commercial and retail lease disputes (Prompt Law, powered by CMI Legal)
✓ Licensed NSW lawyers, fixed professional fees confirmed upfront
✓ 100% online across NSW, same-day response, no office visit required
If your landlord is threatening to call on your bank guarantee, book a free 15-minute consultation with our commercial lease lawyers. We will read the security clause, tell you whether the call is within the lease, and set out the fastest way to protect your position.
This article is general information only and is not legal advice for your specific situation. Whether a landlord can call on or keep a bank guarantee depends on the terms of your lease, whether the Retail Leases Act 1994 (NSW) applies, and your individual circumstances.
Often, yes. The bank’s obligation is to pay against a compliant demand, and the bank does not need your consent or give you prior notice. Your lease may separately require the landlord to serve a breach notice or allow a remedy period before calling on the security, and a landlord who ignores that requirement is in breach of the lease, even though the bank still pays.
Rarely. Courts treat an unconditional guarantee as the equivalent of cash and will only restrain a call in narrow circumstances, principally fraud, unconscionable conduct, or where the lease contains a clear promise limiting when the landlord may call on it. Any application has to be made urgently, before the demand is presented, and usually requires an undertaking as to damages.
Only the amounts the security clause covers and that you actually owe. If the landlord draws the full guarantee to cover a claim that is inflated or not yet established, the excess is recoverable from the landlord, through NCAT for a retail lease or through the courts for other commercial leases. Keep in mind that the landlord holds your money while that is argued.
For a retail shop lease, section 16BA of the Retail Leases Act 1994 (NSW) requires the landlord to return the original guarantee within 2 months after you complete the obligations it secures, with a maximum penalty of 50 penalty units for failing to do so. The period is paused while the landlord’s entitlement to claim on the guarantee is before a court or the Tribunal.
The bank pays the landlord and then recovers from you, typically by taking the term deposit that secures the guarantee or by drawing on the facility behind it. You are left out of pocket while the dispute continues, and the claim becomes yours to run, which is the practical reason acting before a call is so much better than acting after one.
Each has trade-offs. A bank guarantee leaves your cash with the bank rather than the landlord, and for a retail lease it must be returned within 2 months of your obligations ending. The downside is that it pays out on demand with little warning. A cash bond under a retail shop lease is lodged with the NSW Retail Bond Scheme, which makes it harder for a landlord to take unilaterally, but the money leaves your business from day one. A commercial lease lawyer can tell you which is better for your position before you sign.
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