Securing a commercial lease agreement in Poland – a bank guarantee

What is a bank guarantee?

Pursuant to Article 81 of the Polish Banking Act, a bank guarantee is a unilateral undertaking by a bank, as the guarantor, that, once the entitled party (the beneficiary of the guarantee) has fulfilled specific conditions for payment, which may be established by documents specified in the guarantee and which the beneficiary attaches to a demand for payment drawn up in the prescribed form, the bank will make a payment to the beneficiary of the guarantee, either directly or through another bank.

In practice, this definition means that, should the tenant fail to fulfil their obligation to pay rent or other sums due under the tenancy agreement, the landlord (as the beneficiary of the guarantee) may claim payment directly from the bank, up to the limit specified in the guarantee.

The legal relationship under a bank guarantee arises solely between the bank and the beneficiary of the guarantee. The tenant is not a party to the bank guarantee agreement, although it is usually the tenant who initiates its establishment as security for the tenancy agreement.

What are the advantages of a bank guarantee for the landlord?

The most important advantage of a bank guarantee for the landlord is that it provides a high degree of certainty that the obligation will be fulfilled, irrespective of the contractual relationship between the landlord and the tenant.

In practice, this means that the bank, as the guarantor, does not, as a rule, examine any dispute between the parties to the tenancy agreement, but makes the payment within the limits specified in the guarantee, once the formal conditions set out therein have been met.

In accordance with the resolution of the Polish Supreme Court, sitting in a panel of seven judges, having the force of a legal principle, dated 16 April 1993 (case no. III CZP 16/93), a bank issuing a bank guarantee containing the clauses ‘irrevocably’ ‘unconditional’ and ‘on first demand’ may not validly rely, for the purpose of excluding or limiting the payment obligation it has assumed, on defences arising from the underlying relationship in connection with which the bank guarantee was issued.

Why can a bank not refuse to pay under a bank guarantee?

The bank’s liability under a bank guarantee arises upon fulfilment of the conditions set out in its terms and the beneficiary’s effective submission of a claim for payment.

In accordance with the established position of the Polish Supreme Court, as set out in its resolution of 16 April 1993 (III CZP 16/93) and confirmed in the resolution of 28 April 1995 (III CZP 166/94), a bank guarantee that is ‘irrevocable’, ‘unconditional’ and ‘on first demand’ constitutes an abstract obligation. This means that the bank cannot validly refuse to make a payment by invoking defences arising from the underlying relationship, i.e. the contract between the landlord and the tenant.

What are the implications of the tenant’s insolvency for the bank guarantee?

A key consequence of the abstract nature of the guarantee is its independence from the tenant’s financial situation. The tenant’s declaration of insolvency does not affect the bank’s obligation to honour the guarantee, provided that the conditions for its activation have been met.

What are the practical advantages of a bank guarantee for the tenant?

For the tenant, a bank guarantee, given that it is, as a rule, issued by banks in a stable financial position, serves as an instrument that enhances their credibility in the eyes of the landlord. This may be significant when negotiating the other terms of the tenancy agreement, as well as other forms of security.

Furthermore, the use of a bank guarantee avoids the need for the tenant to commit significant funds directly. Unlike a security deposit, which requires cash to be actually deposited or frozen, a bank guarantee does not place such a strain on the tenant’s cash flow.

What elements should a bank guarantee in a commercial lease agreement contain?

First and foremost, a bank guarantee should clearly specify the scope of the tenant’s obligations covered by the security arising from the lease agreement. In practice, this most often covers not only the rent but also other amounts due in connection with the use of the leased property, such as service charges, interest on late payments and (depending on the terms of the guarantee) other monetary payments arising from the agreement, including rent indexation and potential rent increases.

This scope should be formulated as precisely as possible, as it is the terms of the guarantee that determine which of the landlord’s claims can be effectively satisfied by the bank.

What should the amount of the bank guarantee be?

A bank guarantee is issued up to the monetary amount specified in its terms, which means that the bank is not obliged to pay out any sum exceeding the specified limit, regardless of the tenant’s actual debt.

In practice, this means that if the monthly rent is 10,000 zł, and the guarantee has been issued for PLN 20,000, then even if the tenant’s debt amounts to PLN 30,000, the landlord may only claim from the bank an amount limited to the guarantee sum, i.e. PLN 20,000.

In practice, this means that if the rent is 10,000 zł per month, and the guarantee has been issued for PLN 20,000, then even if the tenant’s debt amounts to PLN 30,000, the landlord may only claim from the bank an amount limited to the guarantee sum, i.e. PLN 20,000.

In market practice, the amount of the bank guarantee most often corresponds to the equivalent of 3–6 months’ rent plus VAT and, depending on the structure of the agreement, also the equivalent of 3–6 months’ service charges. This is the standard level of security used in commercial tenancy agreements, although the final amount of the guarantee is always subject to negotiation between the parties.

How long should a bank guarantee remain valid?

It is important that the bank guarantee precisely specifies its term of validity, and in particular the deadline by which the beneficiary (the landlord) may validly submit a claim for payment to the bank.

In practice, this deadline should be stated unambiguously by specifying a specific cut-off date. If the lease agreement has been concluded for the period from 1 January 2020 to 1 January 2030, it is generally accepted that the bank guarantee should remain valid at least until 1 March 2030. This takes into account the need for final settlements between the parties after the lease has ended, particularly with regard to service charges.

How do you submit a claim for payment under a bank guarantee?

A claim under a bank guarantee should be made within the time limit specified in the guarantee; in practice, however, it is crucial to meet the expiry date, as once this has passed, the bank will, as a rule, refuse to honour the claim.

The method of submitting the claim is strictly defined in the guarantee document and most often takes one of two forms:

• direct written form – involving the delivery of the claim to the bank by registered post, courier or in person, usually accompanied by confirmation of the authenticity of the signatures (e.g. by the bank holding the beneficiary’s account or by a notary), confirming that they were signed by persons authorised to represent the beneficiary,
• bank channel (SWIFT) – involving the transmission of the claim via the beneficiary’s bank in the form of a SWIFT message, with that bank simultaneously confirming that it holds the original claim and that its content matches the document submitted to the guarantor bank.

When will the bank pay out funds under a bank guarantee?

Payment under a bank guarantee is made once the conditions specified in its terms have been met. In practice, the scope of these conditions depends on the structure of the guarantee, in particular whether it is a ‘first demand’ guarantee or whether it provides for additional documentary requirements.

In most cases, the guarantee stipulates that payment is triggered by the beneficiary (the landlord) submitting a statement regarding the tenant’s failure to perform or improper performance of their obligations, in particular with regard to the payment of rent or other sums due under the tenancy agreement, often preceded by a formal demand for payment addressed to the tenant, setting an additional deadline.

Depending on the terms of the guarantee, additional documents may also be required to support a claim for payment, such as:

• confirmation of the amount claimed from the tenant,
• documents confirming that the formal conditions set out in the guarantee have been met (e.g. a prior demand for payment).

Why should a bank guarantee be unconditional and payable on first demand?

From the landlord’s perspective, it is crucial that the bank guarantee is ‘on first demand’ and unconditional. This means that the bank is not entitled to examine the underlying relationship between the landlord and the tenant or to question the validity of the claim made.

In practice, the payment of funds should depend solely on the fulfilment of the formal conditions set out in the guarantee, such as the correct form of the claim or the submission of specific declarations, without the need to provide additional documents relating to the tenancy agreement itself (e.g. the agreement, invoices or settlement statements).

At the same time, it is important that the guarantee is irrevocable, meaning that it remains in force for its entire term and cannot be unilaterally revoked by the bank or the principal before the expiry of its term.

Can a bank guarantee be renewable?

A bank guarantee may be structured as a so-called revolving guarantee, which means that the utilisation of its limit, in particular through the payment of part or all of the amount by the bank,  does not result in a permanent reduction of the guarantee amount, but rather its automatic restoration to the original level until the expiry of its term.

A separate structure is the so-called reduction guarantee, in which each disbursement made by the bank or each payment made by the tenant results in a corresponding reduction in the available guarantee limit, until it expires completely.

In practice, the choice between these models depends on the arrangements between the parties and the structure of the security provided for in the lease agreement.

When does a bank guarantee expire?

The bank guarantee document should clearly specify the events that result in its expiry. In practice, this list is limited and primarily includes:

• payment by the bank of the full amount under the guarantee, regardless of whether the guarantee document is returned;
• the beneficiary (landlord) submitting a written statement releasing the tenant from the obligations covered by the guarantee;
• the beneficiary returning the original guarantee to the bank;
• the expiry of the guarantee’s validity period, which in practice constitutes the primary and most common ground for its expiry.

Notwithstanding the above, the validity of the guarantee’s enforcement depends on the beneficiary’s compliance with the formal requirements set out in its terms, in particular those concerning the manner of submitting a claim for payment and proper representation.

When may a bank refuse to pay the amount due under a bank guarantee?

It should be borne in mind that, in practice, payment under a bank guarantee is made only if the conditions set out in its terms are met. This means that even minor formal shortcomings in the content of the claim may result in the bank refusing to honour the guarantee.

For this reason, both the content of the guarantee itself and the manner in which it is utilised in practice should be analysed on a case-by-case basis against the formal requirements set out in its terms.

Examples of situations in which a bank may refuse payment include, in particular, circumstances where:

• the guarantee does not cover the landlord’s claim,
• the guarantee is invalid (it was issued in breach of the Polish Banking Act, or was signed by a person or persons not authorised to issue it),
• the landlord submitted the claim after the guarantee’s expiry date,
• the claim was submitted in a form other than that specified in the guarantee (e.g. by email rather than in writing),
• the claim was submitted before the circumstances entitling the lessor to make it had arisen (e.g. it is a requirement to demand payment from the tenant before invoking the guarantee),
• the claim was not signed by persons authorised to represent the landlord (e.g. it was signed by a single member of the board of directors, whilst the company requires representation by two persons),
• the claim was sent to the wrong address (e.g. the address of a branch rather than the bank’s head office),
• the required documents were not attached,
• the terms of the guarantee relate to a contract other than the one on the basis of which payment is being sought.

Summary

A bank guarantee is one of the most important forms of security in commercial leasing, particularly in large premises with high rental values. It works in such a way that the bank undertakes to pay the landlord a specified amount if the tenant fails to perform under the lease agreement, primarily in relation to payment obligations.

It is an abstract obligation, meaning the bank does not examine the underlying dispute between the parties and cannot rely on the landlord–tenant relationship if the formal conditions of the guarantee are met. In practice, this makes it significantly more effective than standard security instruments such as a deposit.

Typically, a guarantee covers 3–6 months of obligations and must be precisely structured, with a clearly defined scope, validity period, and claim procedure. Formal requirements are critical, and any failure to comply may result in refusal of payment.

For the landlord, it provides a high level of protection, including in cases of tenant insolvency. For the tenant, it is an alternative to locking up a cash deposit, although it involves banking costs.