Bank Guarantee in case of Bankruptcy of the Lessee

Recently the Supreme Court has made an important judgment relating to claims for damages by a lessor of commercial real estate resulting from defaulted lease contracts, which are guaranteed by a bank.

Commercial real estate contracts have a typical duration of 5 years or longer. The chance that lessees may go bankrupt during such long lease periods is therefore a significant risk for lessors. Lessors of commercial real estate have therefore often required bank guarantees from their lessees to support their lease payment obligations, especially when lessees go bankrupt. Lessees have instructed their banks in such cases to issue a bank guarantee in favor of the lessor. Under such a bank guarantee, the bank will pay a certain amount (such as missed lease installments) to the lessor in case the lessee goes bankrupt. If the bank has paid out under the bank guarantee, it will claim repayment of such amount from the lessee under a so-called counter guarantee issued by the lessee in favor of the bank.

Under Dutch Caribbean law, the bankruptcy administrator and the lessor may terminate a lease contract subject to a notice period if the lessee has become bankrupt. Such a termination does not entitle the lessor to full compensation of damages, consisting of future loss of rental income until such time as the lease would normally have terminated, from the bankrupt estate. Not even if such compensation had been contractually agreed. However, such a contractual agreement to fully compensate damages is in fact enforceable against the lessee. A bank guarantee issued by a third party i.e. a bank, can therefore also be called upon for full compensation of damages.

However, the bank cannot (re)claim full damages against the bankrupt estate as this is more than what the lessor is entitled to claim. This has already been decided by the Supreme Court before and has been reconfirmed. This means that the bank will be faced with a loss: the difference between the amount that it paid out to the lessor and the amount that it can claim back from the lessee. In view of this banks have already started amending their bank guarantee issuance policies for these types of bank guarantees.