Bank Guarantees for Commercial Leases: What Businesses Need to Know

If you’re negotiating a new commercial premises lease (or renewing an old one), there’s a good chance your landlord will ask you to provide a bank guarantee for your commercial lease.

For many small businesses, this can feel like one more major hurdle to getting the keys. How much will it cost? How long will the landlord hold it? What triggers a claim? And is the bank guarantee clause negotiable?

The good news is that a bank guarantee isn’t automatically “bad” for tenants - but it does carry real risk if the wording is broad, unclear, or mismatched to your actual obligations under the lease.

Below, we break down how a bank guarantee arrangement typically works for an Australian commercial lease, what to watch for in the lease, and how to negotiate practical terms that protect your cashflow while keeping your landlord comfortable.

What Is A Bank Guarantee For A Commercial Lease?

A bank guarantee for a commercial lease is a security instrument issued by your bank in favour of your landlord. In plain terms, it’s the bank promising the landlord they can be paid up to a set amount if you don’t meet certain lease obligations.

It’s commonly used as “security” for things like:

• unpaid rent (including outgoings, depending on the lease),
• make good and reinstatement obligations at the end of the lease,
• damages or losses the landlord claims are caused by a breach, and
• other amounts payable under the lease (which can be very broad if not drafted carefully).

Importantly, a bank guarantee is not the same as paying a cash bond to the landlord. With a bank guarantee, your money usually stays in your account - but your bank will typically:

• charge fees to issue and maintain the guarantee, and
• require security (often a cash term deposit or other collateral), depending on your business and credit position.

From the landlord’s perspective, a bank guarantee is attractive because it can be “called” (claimed on) more easily than chasing you through debt recovery if something goes wrong.

From your perspective, it can affect your working capital and borrowing capacity. That’s why the details matter.

Why Do Landlords Ask For A Bank Guarantee Lease Clause?

Commercial landlords are usually thinking about risk. Even if you’re a responsible tenant, the landlord may still be concerned about what happens if:

• your business has a downturn and rent stops being paid,
• there’s a dispute about make good at the end of the lease, or
• you abandon the premises before the end of the term.

A commercial lease bank guarantee helps the landlord feel protected, particularly when:

• your business is new (limited trading history),
• you don’t have substantial assets,
• the fitout is significant, or
• the landlord is offering incentives (like a rent-free period) and wants security in return.

It’s also common for landlords to ask for a bank guarantee when the tenant is a company with limited assets. If you’ve set up a company for liability protection (which is often sensible), the landlord may want extra comfort because the company itself might not have much behind it.

If you’re still early in negotiations, this is a good time to get your Commercial Lease Review sorted, because bank guarantee clauses can be surprisingly tenant-unfriendly if you sign without tightening the wording.

What Are The Key Terms To Check In A Bank Guarantee Commercial Lease?

If you’re agreeing to a bank guarantee requirement under your commercial lease, don’t just focus on the dollar amount. The real risk is in the “when and how” of a call, and what you must do to get the guarantee released.

1) How Much Does The Bank Guarantee Need To Be?

There’s no single rule in Australia, but many landlords ask for a bank guarantee equivalent to:

• 3-6 months’ rent (sometimes including GST), or
• a multiple of rent plus estimated outgoings, or
• an amount linked to the fitout/make good exposure.

What matters is whether the amount is proportionate to the landlord’s risk. For example, if your lease already has a strong make good clause, and you’re paying rent monthly in advance, a very large guarantee may be more than the landlord reasonably needs.

2) What Can The Landlord Claim It For?

This is one of the most important points.

Some leases allow the landlord to call on the bank guarantee for “any amount the landlord claims is owing under the lease”. That kind of wording can create risk because it may allow a call even while a dispute is ongoing.

Where possible, you want the lease to be clear about:

• which obligations are covered (e.g. rent arrears after notice),
• whether notice is required before a call, and
• whether the call can happen during a dispute (and in what circumstances).

Even if you can’t remove the landlord’s right to call entirely, you can often negotiate a more structured process that reduces the chance of an unexpected call.

3) Is The Guarantee “Unconditional” And Payable On Demand?

Most bank guarantees are drafted as “unconditional” and “payable on demand” instruments. In practice, this means if the landlord presents a compliant demand to the bank, the bank may pay - even if you disagree with the landlord’s claim.

That doesn’t necessarily mean the landlord is entitled to keep the money forever, but it can shift the dispute into a “recover it later” scenario, which can be painful for cashflow.

This is why it’s important to understand a key practical limitation: even if your lease says the landlord should give notice or follow a process before making a claim, those lease terms don’t usually stop the bank paying out once a compliant demand is made under an on-demand guarantee. Instead, if the landlord calls on the guarantee contrary to the lease, the dispute is typically about whether the landlord breached the lease and whether you can recover the amount later.

Because of this, it’s important to pair the bank guarantee clause with a sensible default/dispute process in the lease, and to keep the landlord’s call rights as tightly framed as possible.

4) When Does The Bank Guarantee Have To Be Provided?

Check the timing carefully. Many leases require you to provide the bank guarantee:

• before the lease starts,
• before you get access for fitout, or
• within a short number of days after signing.

From a practical perspective, banks can take time to issue guarantees, especially if you’re setting up a new facility or you don’t have a long banking history.

It’s worth negotiating:

• a realistic timeframe, and
• clarity on whether you can have access for fitout before the guarantee is issued (if you’re already paying a deposit or other security).

5) How And When Is The Bank Guarantee Released?

Tenants often assume the guarantee will be returned automatically when the lease ends. In reality, release can become a sticking point - particularly if the landlord alleges make good issues, cleaning costs, or damage.

Ideally, the lease should clearly set out:

• the trigger for release (e.g. when all obligations are satisfied),
• the timeframe for the landlord to return the original instrument, and
• what happens if there’s a dispute about make good.

If you ever need to assign the lease to a buyer (for example, if you sell the business), you’ll also want clarity on whether your bank guarantee is released on assignment and replaced by the incoming tenant’s security. This ties closely to the paperwork and timing in a Deed of Assignment of Lease.

6) Does The Lease Require You To “Top Up” The Guarantee?

Some leases say if the landlord calls on the bank guarantee (even partially), you must “top it back up” to the original amount within a short time.

This can be reasonable in concept, but it’s important you understand the risk: a disputed call could trigger a top-up obligation and put you under immediate financial pressure.

If you see a top-up clause, consider negotiating notice requirements and dispute protections around calls on the guarantee.

How Do You Negotiate A Bank Guarantee For Commercial Lease Terms?

In many cases, landlords will present the bank guarantee requirement as non-negotiable. But even if the existence of the bank guarantee is fixed, the details are often negotiable - especially if you approach it commercially and explain what you need to operate sustainably.

1) Ask For A Lower Amount Or A Step-Down Over Time

If the landlord is worried about early-stage risk, a step-down structure can be a fair compromise.

For example, you might propose:

• a higher guarantee for the first 6-12 months, then
• a reduction after you’ve demonstrated consistent payments and compliance.

This can be especially persuasive if you’re investing heavily in fitout and need to protect cashflow.

2) Limit The Call Rights (Or Add A Notice Requirement)

Even where the bank guarantee itself is payable on demand, the lease can still set expectations about when the landlord is entitled to make a call, and what happens if they don’t follow the lease process.

Common tenant-friendly terms include:

• the landlord must give written notice of the alleged default,
• you must have a reasonable time to remedy (where possible), and
• the landlord can only call for clearly defined categories of loss.

While these clauses won’t necessarily stop the bank paying on a compliant demand, they can reduce the likelihood of a call being made and strengthen your position if the landlord makes an improper call.

3) Check Whether Other Security Is Being Requested (And Avoid Double-Dipping)

Sometimes landlords ask for multiple layers of security, such as:

• a bank guarantee,
• a security deposit, and/or
• a personal guarantee from a director.

In some deals, that may be justified. In others, it’s simply the landlord asking for “everything” because the tenant didn’t push back.

Try to ensure the overall security package matches the risk. If a landlord is insisting on a significant bank guarantee, you may be able to negotiate away (or reduce) other security.

4) Think Ahead If You Might Sell Or Restructure

Many small businesses sign a lease, grow quickly, then later:

• sell the business,
• bring in a business partner or investor, or
• move premises and assign or exit the lease.

Bank guarantee release mechanics can become critical during a sale. If the buyer’s bank takes time to issue a replacement guarantee, you don’t want settlement delayed because the landlord won’t release yours.

This is one reason why it’s worth getting advice early from a Commercial Lease Lawyer so your lease terms align with the way businesses actually operate (and change) over time.

What Are The Risks For Tenants With A Commercial Lease Bank Guarantee?

Bank guarantees are common, but they’re not risk-free. Understanding the main risk areas can help you decide what to negotiate and what to plan for financially.

A Call Can Happen Even If You Disagree

Because many bank guarantees are payable on demand, the landlord may be able to call on it first and argue later.

If you’re relying on that money (or your banking facility) to keep your business running, a call can create significant pressure. That’s why narrowing the call triggers and building in notice requirements is so valuable.

It Can Affect Your Borrowing Capacity

Even if the bank doesn’t take cash upfront, a bank guarantee can reduce your available credit or require security. This is particularly relevant if your bank needs additional protection via a security interest.

For some businesses, the bank may request a broader security arrangement, such as a general security agreement (GSA). If you’re unsure what that means in practice, it’s worth understanding how a general security agreement can impact your assets and financing flexibility.

If your bank is taking security, they may also register that security on the PPSR. This is typically handled by the lender (or their lawyers) as part of the finance documentation, rather than something a tenant independently registers because of the lease. If you’re unsure what your bank is asking for, it’s worth getting advice on what you’re granting and how it may affect future financing.

Make Good Disputes Are Common

Many end-of-lease disputes are not about rent - they’re about the condition of the premises and what you must remove, repair, or reinstate.

If make good is vaguely drafted, a landlord might claim extensive works are required and seek to call on the bank guarantee to fund them.

Practical steps that help reduce this risk include:

• ensuring the lease clearly documents the condition at handover (photos and condition reports help),
• clarifying exactly what “make good” requires, and
• keeping your own records of any landlord approvals for alterations or fitout.

Disputes Can Escalate If The Lease Also Has A Tough Default/Termination Regime

Bank guarantee provisions don’t sit in isolation. They interact with the lease’s default clauses, dispute resolution clauses, and termination rights.

If you’re concerned about worst-case outcomes, it can be helpful to also understand what options exist around endings and disputes, including Lease Termination Advice if the relationship breaks down.

What Happens To The Bank Guarantee When The Lease Ends, Renews, Or Is Assigned?

It’s easy to treat a bank guarantee as a “set and forget” item, but in reality your lease may change over time - and your security should change with it.

End Of Lease

When your lease ends, the landlord will usually check:

• whether all rent and outgoings have been paid,
• whether the premises has been returned in the required condition, and
• whether make good obligations have been completed.

If everything is satisfied, the landlord should return the original bank guarantee instrument so it can be cancelled or released.

If the lease is unclear about timing, you can end up chasing the landlord for weeks (or months). That’s why we like to see a clear timeframe for return written into the lease where possible.

Renewal Or Extension

If you renew your lease or sign an extension, check whether:

• the bank guarantee continues as-is,
• the landlord can require an increased amount (for example, if rent increases), or
• you need to issue a new guarantee with a new expiry format.

This is a good time to revisit your overall lease risk and ensure the security terms still make sense for your business today (not just what the landlord wanted when you first started).

Assignment (For Example, If You Sell The Business)

If you assign your lease to an incoming tenant (often part of a business sale), you’ll want clarity on:

• when your bank guarantee is released,
• whether it’s conditional on the replacement security being provided, and
• whether the landlord can delay release until after completion of any inspections.

These timing issues can directly affect settlement dates and your ability to access funds during the sale process.

Key Takeaways

• A bank guarantee for a commercial lease is a common way for landlords to manage risk, but the wording and call rights can significantly affect you as a tenant.
• Don’t focus only on the dollar amount - check what the landlord can claim the guarantee for, whether notice is required, and how disputes are handled.
• Make sure the lease clearly explains when and how the bank guarantee must be returned or released, especially at the end of the lease or on assignment.
• Bank guarantees can impact cashflow and borrowing capacity, particularly if your bank requires additional security or linked finance arrangements.
• Many bank guarantee terms are negotiable (or at least refinable), and tightening them early can prevent serious issues later.

Important: This article is general information only and does not constitute legal advice. Commercial leasing practices and the law can differ by state and territory, and different rules may apply to retail leases.

If you’d like help reviewing your bank guarantee clause or negotiating your commercial lease terms, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.