Bank guarantee clause: construction and lease security

Sample clause

Written for a fit out contract between a building owner and Swanbourne Fitouts, a fictional Perth contractor, with a lease version for a tenant of the same building.

Security. (a) Within 10 business days after the Contract Date, the Contractor must give the Owner an unconditional and irrevocable bank guarantee from an Australian bank for 5% of the Contract Sum. (b) The Owner may call on the bank guarantee only for an amount the Contractor owes under this contract that remains unpaid 5 business days after the Owner has given the Contractor written notice of its intention to call, stating the amount and the reason. (c) The Owner must return half of the bank guarantee within 10 business days after Practical Completion and the balance within 10 business days after the end of the Defects Liability Period. (d) If the bank guarantee has an expiry date earlier than the date for its return, the Contractor must provide a replacement at least 15 business days before expiry.

Sample wording, not legal advice.

Variants

What to negotiate

• When a call can be made

  An unconditional guarantee lets the holder call without proving anything to the bank, so the contract must set the limits: only for amounts owing under the contract, and only after written notice. Australian courts will usually restrain a call only where it breaches such a contractual limit or involves unconscionable conduct, so the wording of the limit matters more than anything else.

• Notice before calling

  A notice period, typically 3 to 5 business days, gives the party providing security a chance to pay the amount or dispute it before the guarantee is cashed. Without notice, the first sign of a call may be a reduced bank facility. Holders sometimes resist notice for fear the other party will rush to court; a short notice period is the usual compromise.

• Replacement on expiry

  Many bank guarantees carry an expiry date. If the guarantee would expire before the date it is due to be returned, the clause should require a replacement in good time, and allow the holder to call and hold cash if it is not provided. Parties providing security should diarise expiry dates, because a call for failure to replace is hard to undo.

The risk of leaving it out

Without security, a principal or landlord has only a contractual claim against a party that may be insolvent when the claim arises. Without clear limits on calling, the party providing the guarantee faces the risk that it is cashed in a dispute, leaving it to sue to get the money back. A precise clause protects both.

Call and return timeline

In the sample, the timeline runs like this. Contract signed: guarantee due within 10 business days. During the works: a call only for an unpaid amount owing, after 5 business days' written notice. Practical completion: half returned within 10 business days. End of the 12 month defects liability period: the rest returned within 10 business days. Any time the guarantee approaches expiry: replacement due 15 business days before. Each step has a deadline, so neither side has to argue about what a reasonable time means. Law checked on 21 October 2026. This page explains how the clause works and is not legal advice.

Bank guarantees in leases

Commercial leases often ask for a bank guarantee of three to six months' rent. For retail premises, state retail leases laws, such as Victoria's Retail Leases Act 2003, set rules for leases of retail shops, and small business commissioners, such as the Victorian Small Business Commission, help with disputes about security and its return. The Australian Small Business and Family Enterprise Ombudsman provides guidance for small business tenants. A landlord should state in the lease when the guarantee will be returned, and a tenant should ask for return to be tied to vacating and meeting its obligations, not to a separate landlord sign off.

Bank guarantee or cash bond

A bank guarantee keeps the money in the provider's hands until a call, which suits contractors and tenants, though it uses up bank facilities and carries fees. A cash bond is simpler for the holder but ties up the provider's cash, and the holder may have to keep it in a trust or separate account. For residential tenancies, bonds are lodged with a state authority rather than held as guarantees.

Getting the form right

Banks issue guarantees on their own forms, which differ in expiry, how demands are made, and whether partial calls are allowed. The clause should state the essential terms, such as unconditional, irrevocable, from an Australian bank, no expiry or an agreed expiry, and allowing partial calls, so the holder can refuse a guarantee that does not match.

Documents that carry this clause

Commercial lease agreement template with outgoings and fit out termsA retail lease is decided by three numbers and two clauses: the rent, the review, the outgoings, the fit out contribution and the make good. This 12 page Victorian lease sets all five out in the open, including the outgoings the landlord is not allowed to recover at all.Subcontractor agreement template that flows the head contract downA subcontract exists to pass the head contract's obligations down one level and move the money back up on time. This one names the scope by drawing, sets the progress claim dates against the security of payment rules, holds retention and states the insurances, so the trade knows exactly when it is paid and for what.Personal guarantee template with a cap and a notice of demandA director asked to guarantee a lease wants to know one number: the most this can cost me. This three page deed answers it in a callout, capping the guarantor at $60,000 including interest and enforcement costs, then sets out the two steps the landlord has to take before a demand can be made at all.

Questions people ask