Legal Updates

A lessor may exercise a bank guarantee during the Coronavirus crisis despite lessee’s claims for lack of a right to receive rent

May 7, 2020

A hotel owner ceased to pay rent during the Coronavirus crisis and opposed the cashing of the bank guarantee by the lessor.
The Court held that there is no legal impediment to cash the bank guarantee even though questions arise on the moral level. The bank guarantee is a financial instrument of great importance that gives certainty in trade. Cashing of the bank guarantee does not teach of any fundamental right of the guarantor to hold the funds paid by the bank, but merely guarantees that in the event of disagreement between the parties, the guarantor's money will be held by the recipient of the guarantee. The existence of a contractual dispute cannot prevent the cashing of the guarantee and if it later turns out that the guarantee was unjustly cashed, the funds will be reimbursed. Here, the lessee contended that the lessor does not have the right to rent during the Coronavirus crisis because it was precluded from using the leased property and the law enables it not to pay rent and management fees commencing the date in which it had to stop the hotel operation until it reopens to the general public. Although it is a legitimate contractual dispute, this cannot prevent the exercise of the bank guarantee even if there is a moral question whether this is the correct thing to do.