Under a lease agreement, a landlord commits to hand over a thing for a tenant’s use for a fixed or non-fixed term and the tenant commits to pay the landlord the agreed rent. When the lease ends, the tenant is obliged to return the thing in a non-deteriorated condition; however, is not liable for normal wear and tear.The most common kind of the lease is a lease of premises – of an office, commercial or industrial space, as it enablesthe tenant to conduct business activity at the said premises without holding the ownershiptitle thereto. Over the years, specific types of collaterals to secure tenant’s obligations under lease agreements havefound their place in Polish legal and business practice. They are established to secure: payment of the fees due from the tenant under the lease agreement and performance ofnon-pecuniary obligations of the tenant under the lease agreement, including the obligation to return the leased premises after the end of the lease.
I. DEMAND GUARANTEES
Demand guarantees are ones of the most popular securities, as they are granted by a reliable and widely known financial entities, such as banks or insurance companies.The conditions of their issuance and payment are based on objective, non-discretionary rules which limits the risk of dispute.In addition, they do not require the tenant to give out a big amount of money at once, at the beginning of business operation. The fees for issuance of a payment guarantee may, however, be also significant.
Demand guarantees are not fully regulated in Polish law. The bank lawact provides for basic rules on bank guarantee only. Therefore, rules of their functioning have been formed by following both the market practice and guidelines created by international organizations. The most commonly applied set of universal rules on demand guarantees was developed and signed in 2010 by International Chamber of Commerce (ICC) as Uniform Rules for Demand Guarantees (URDG 758).
A bank guarantee is a unilateral written undertaking of a bank (guarantor)that, once a beneficiary of the guarantee (landlord) has met particular payment conditions (what may be confirmed with documents enlisted in the bank guarantee, attached by the beneficiary to the payment demand), the bank will pay (directly or via another bank) a certain amount of money in favour of the landlord.
The guarantee may secure all the amounts due from the tenant under the lease agreement, i.e. the rent, service charges, service utilities fees, but also contractual penalties due from the tenant,the costs of damagecaused by the tenant to the premises, or the landlord’s outlays in fit-out works done on the premises in view of the particular lease transaction. Typically, the maximum amount of the bank guarantee is equal to 3-months’ rent and service charges due under a given lease agreement, both increased by VAT, but in practiceit depends on the possible level of the tenant’s debt and landlord’s investment in the premises.The bank guarantee validity period is usually longer than the lease term (usually 3 months longer), so that the landlord couldseek its claims regarding the damage caused by the tenant to the premises after they have been handed over back to the landlord.In the lease agreement the parties usually agree that the bank guarantee to be delivered by the tenant may cover the entire lease term or, in case of long-term leases, may cover first 12 months and be prolonged prior to its expiry. In case of long-term leases, the tenant is also usually obliged to adjust the amount of the bank guarantee if the rent or service charges increase or are subject to revision/valorization.To be able to draw from the bank guarantee, the landlord has to demonstrate to the bank that the condition precedent required under the bank guarantee, namelytenant’s failure in performing its pecuniary obligations under the lease, in spite of being granted additional cure period by the landlord, has been met.
In order for this collateral to be reliable for the landlord, the bank guarantee should be irrevocable, unconditional and paid at first demand. In order to enable the landlord’s successor to step in as a beneficiary, it should be also freely transferable. Otherwise, transfer of the bank guarantee should require the bank’sconsent.
Insurance guarantees function comparably to the above-described bank guarantees. Insurance guarantee is an insurance product whereby an insurance undertaking commits itself, in writing, to pay in favour of a beneficiary (landlord) - at its demand - aparticular amount of money if a debtor (tenant) does not comply with its obligations towards the beneficiary, described in such insurance guarantee. In practice, insurance guarantees are usually issued as an investor’s security in case of a fortuitous event occurring.Fees for obtaining an insurance guarantee are usually lower than the those for a bank guarantee.Insurance guarantee also includes the maximum amount up to which insurance company may be held liable, conditions of payment, validity period, and terms of transferring such guarantee.
II.PARENT COMPANY GUARANTEE
Parent company guarantees are a very common measure.Pursuant to the standard guarantee of the parent company, the guarantor (parent company or other related company from the capital group) guarantees the proper and timely performance by the party to the contract (main debtor being a company from the same capital group) of obligations arising from the contract concluded with the other party (main creditor who is the beneficiary of the guarantee). Thus, their purpose is to provide one party with security in the event the other party fails to comply with its contractual obligations. Sometimes, instead of providing a parent company guarantee, parent companies might alternatively provide a generally worded letter of support confirming that it is the group’ policy to ensure its subsidiaries are able to meet their liabilities.Such guarantees are predominantly issued rs when a company that is a party to the contract has limited executive capacity, does not have sufficient financial resources or is a special purpose vehicle established to implement the project, at the same time such a company being a part of a larger capital group. The parent company’s guarantee is typically issued either by the parent company at the headquarters of the capital group or by another related company from the group having adequate financial resources, executive capacity or meeting the relevant criteria, e.g.in the field of credit rating or financial liquidity.
The parent company guarantee can secure both the performance of all contractual obligations or a particular type of liability. These can be financial, non-financial and future claims. The obligation to provide the parent company’s guarantee usually results from the content of the concluded contract. Due to the fact that the content of the parent company’s guarantee is not regulated by law, the parties to the contract may freely adapt its provisions to the needs of a given contractual relationship, with the proviso that its content or purpose does not contradict the properties (nature) of the relationship, law or the principles of social coexistence.
Cash deposit is an amount of money paid by the tenant to the landlord in order to secure the tenant’s financial obligations under the lease.In contrast to the bank guarantee, cash deposit requires an actual transfer of particular amount of money between the parties, it is therefore more common inlease agreements for smaller premises.Under the lease, the parties should explicitly agree the conditions under which the landlord is entitled to draw from the cash deposit held. Usually, the condition consists in the tenant’s failure to perform his or herfinancial obligations under the lease, in spite of being grantedanadditional cure periodby the landlord.Standard amount of the cash deposit is 3-months’ rent and service charges due under the given lease agreement, both increased by VAT, but the size of the deposit depends on the landlord’s underlying risk exposure.If the cash deposit is used up or the rent or service charges change, e.g. as a result of a revision/valorization, the tenant is usually obliged to supplement the amount.After the lease ends, the landlord returns the cash deposit to the tenant, due amounts having been deducted therefrom, if any.Under the lease the parties should agree whether the cash deposit will be kept by the landlord on interest-bearing or interest-free bank account and, in case of the first one – which party is entitled to the interest thereout.In contrast to the bank guarantee, this security measure does not require assistance of the third party (bank), so it is easier available to the landlord.In case of change of the landlord (e.g. as a result of a property sale) the cash held as cash deposit is reconciled between the previouslandlord and the new one within the sale transaction.
IV. PROMISSORY NOTE& BILL OF EXCHANGE
Promissory note (in Polish: wekselwłasny) is a financial instrument providing foran unconditional obligation of an issuer(tenant) to pay a determined amount to the payee (landlord) within a fixed time limit, either at the payee’s demand or under specific terms,and in the determined place.
A bill of exchange(in Polish: wekseltrasowany)is a kind of promissory note providing for the said payment obligation but with regard to a third party as indicated by the issuer. Requirements regarding the content of both documents are precisely described in the provisions of law.In case of blank promissory notes, the issuer and the payee -in an agreement called “promissory note declaration” - agree on the circumstances in which a promissory note may be completed and the maximum amountto be indicated therein.The rights resulting from a promissory note may be transferred by endorsement (in Polish: indos), i.e. a written statement of a landlord on the promissory note, or by assignment of the rights by means of an agreement.
Claims from a promissory note may bepresented for resolution to a court. The claim may be sought in payment-order proceedings (in Polish: postepowanienakazowe) if the claimant applies for issuing a writ of payment. As a result of this relatively fast proceeding,the court may oblige the issuer of a promissory note either to pay the sought amount within two weeks or raise a complaint against the payment order (in Polish: zarzuty). Regardless or the issuer’s action, the promissory note becomes enforceable after two weeks and,the enforcement clause having been issuedit may be subject to enforcement with respect to the amount sought.Moreover, as of the date of its issuance, the payment order constitutes a security title.
V. SUBMISSION TO ENFORCEMENT WITH RESPECT TO PAYMENTS and WITH RESPECT TO RETURNING THE PREMISES TO THE LANDLORD
A notarized voluntary submission to enforcement by the tenant is one of the legal instruments safeguarding the landlord’s interests, in particular in case of (i) delays in rent payments or (ii) tardiness in returning the rented property after the lease expiry . The first one is related to arrears in payments resulting from the tenant’s action or failure to act while the second one concerns the obligation to leave the premises after the lease ends. A notarial deed of voluntary submission to enforcement by a tenant is a tool by which the landlord my spare themselves a lengthyjudicial battle to evict the tenant and, by and large, allows to speed up the commencement of the enforcement proceedings which in that case take approx. 2-3 weeks. The court will not investigate whether the obligation has really been contracted, but only whether the notary deed meets the above-mentioned formal requirements. Enforcement clause gives grounds to initiate enforcement from the tenant’s property. The enforcement is performed by the bailiff. Therefore, with occasional and institutional lease gaining popularity, anotarized voluntary submission to enforcement by the tenant. becomes an increasingly popular way to secure the lease,as is appears to be the fastest means to enforce the landlord’s claims.
As demonstrated above, the market has developed a wide variety of lease collaterals.In accordance with the market practice in Poland, the tenant is usually required to provide one of three types of securities: a notarial deed including submission to enforcement with respect to payments and submission to enforcement with respect to returning the premises to the landlord, as well as one of the above-described securities established to guarantee the tenant’s payment of the fees under the lease. Particular type of security should, however, be individually chosen by the parties to the lease,bearing in mind the landlord’s risk exposure under the given lease agreement, the tenant’s financial capacity, length of the lease and profitability of the lease.