Bank guarantees are a common part of commercial and retail leases, where a bank promises to pay a sum specified when certain events occur, such as where a tenant breaches a lease, but the Supreme Court of NSW has ruled that a landlord can, in some situations, be restrained from relying on such a guarantee.

In the case of Universal Publishers Pty Ltd v Australian Executor Trustees Ltd [2013] NSWSC 2021 the court was asked to determine whether the landlord could call on the bank guarantee where the landlord claimed in good faith that the tenant was in breach of the lease, rather than an actual breach in fact. This was the key issue, as the landlord wanted to call upon the bank guarantee before proceedings relating to the breach had been finalised in court. Ultimately the court constructed the contract as meaning that that the bank guarantee could only be relied upon where there was an actual breach of the lease, which cannot be found if there is a genuine dispute as to whether the tenant had breached the contract.

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