Important court decision on rental bank guarantees

On 17^th February 2017 the Supreme Court of the Netherlands (Hoge Raad) 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.

In the Netherlands, commercial real estate contracts have a typical tenor of 5 years or longer. The chance that lessees may go bankrupt during such long lease tenors is therefore a significant risk for lessors. Lessors of commercial real estate have therefore often required bank guarantees form 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 favour of the lessor. Under such a bank guarantee, the bank will pay a certain amount (such as missed lease instalments) 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 favour of the bank.

Under Dutch law, the insolvency administrator and the lessor may terminate a lease contract subject to a notice period of a maximum of three months if the lessee has become bankrupt. Such a termination does not entitle the lessor to full compensation of damages 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 enforceable against the lessee.

However, the bank cannot 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 claimed back from the lessee. As a result banks have amended their bank guarantee issuance policies for these types of bank guarantees. This decision by the Supreme Court concludes something else too: if the bank has nonetheless successfully claimed full compensation from the bankrupt estate after it has paid out the same amount to the lessor – e.g. if the insolvency administrator has not contested this compensation – this does not constitute unjust enrichment of the lessor. This means that the lessor will not have to pay back the amount it received under the bank guarantee.