eGuarantees – out with the old and in with the new

While traditional bank guarantees and cash security deposits have long been the preferred form of security to secure a tenant’s obligations under a lease, Lease Bonds issued and managed through the Assetinsure Pty Ltd eGuarantee platform (eGuarantee) are a digitised, non-collateralised alternative to traditional bank guarantees.

Although more recently gaining traction since entering the Australian and New Zealand market in 2021, eGuarantees are not a new concept. Globally surety bonds for lease security have been the status quo in terms of lease security.

What is an eGuarantee?

eGuarantees are a digital form of financial guarantee that provide assurance of performance or payment under specific conditions.

An eGuarantee can be used to secure performance or payment under leases over any commercial premises – office, industrial and retail spaces, childcare centres, data centres and healthcare facilities.

An eGuarantee is a three-party contract, between a landlord, tenant and the issuer of the eGuarantee.   The issuer of the eGuarantee issues the eGuarantee at the request of the tenant, in the amount agreed with the tenant.  The tenant pays an annual fee to the issuer of the eGuarantee whille the eGuarantee is in force.

If the tenant breaches its obligations under the lease, the landlord makes a claim under the eGuarantee on the issuer of the eGuarantee.

The claim is made by the landlord electronically.

Provided the conditions stipulated in the eGuarantee are met, the issuer of the eGuarantee must pay any claims made unconditionally and on-demand.

The issuer of the eGuarantee recovers the amount paid to the landlord from the Tenant.

The obligations of the issuer of the eGuarantee to the landlord are not affected by the tenant defaulting in the payment of the annual premium in respect of the eGuarantee.

Who issues them?

eGuarantees are issued by Assetinsure Pty Ltd, an Australian Prudential Regulation Authority (APRA) regulated entity as agent for HDI Global Specialty SE, and S&P A+ rated insurer.

How do they compare to bank guarantee?

For the most part, eGuarantees are similar to traditional bank guarantees in that they are worded very similarly to a bank guarantee (i.e. an unconditional, on-demand and irrevocable financial instrument).

The key differences between bank guarantees and eGuarantees are that aGuarantees are:

• issued through the insurance market instead of being issued through the banking markets; and
• executed and managed electronically.

These differences are designed to improve speed, efficiency and record keeping.

Disclaimer

The information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.