Real Estate News

Belgium: Bank guarantees, parental guarantees and other rental guarantees

19 January 2012
by Michaël Bollen

The obligations of the lessee are generally secured by a rental guarantee, for example in the form of a bank guarantee (possibly at first request) or a 'parental guarantee.' How do these different types of guarantee relate to one another and what are their essential characteristics?

The independent (bank)guarantee ('bankgaranti'/ 'garantie bancaire') is generally characterised as a unilateral obligation of the bank to pay a certain amount of money (some months of rent), if the conditions of the guarantee are fulfilled. The guarantee ('bankgarantie'/ 'garantie bancaire') is independent or 'abstract' because it is detached from the underlying legal relationship between the principal/ lessee on the one hand and the beneficiary/ lessor on the other. This entails that the principal/ lessee can in principle not oppose the execution of the guarantee if the conditions are fulfilled, but also that the bank can raise no exceptions (ie reasons for non-execution) arising from the underlying conditions or 'first paying, then discussing'. Only in case of manifest abusive or fraudulent appeal to the guarantee, payment can be refused (by the judge).

A typical example is the first demand guarantee ('bankgarantie op eerste verzoek'/ 'garantie bancaire à première demande') by which the bank needs to proceed to payment at lessor's first request, thus without lessor providing any proof of non-payment or default of the lessee. An alternative is the independent guarantee by which one can only proceed to payment following an agreement between lessee and lessor, a report of an independent expert and/ or a judgement. In this alternative too, the bank can raise no exceptions from its relationship with the lessee or from the relationship between lessee and lessor.

In case of payment of the guarantee the bank will in principle recover the paid sums from the lessee, its principal.

An independent guarantee does not necessarily need to be drawn up by a bank. For example, also the mother company of the lessee can act as a guarantor.

To some extent related to the above types of guarantee (and often also confused therewith) are the 'borgstelling'/ 'caution' at first request. Borgstelling/ caution is a contract described and regulated in the Belgian Civil Code by which one party, the guarantor, engages himself unilaterally in favour of a creditor (the lessor) to comply with the obligation of a debtor (the lessee). It also constitutes a personal security. Contrary to the independent guarantee ('garantie'), this type of guarantee (borgstelling/ caution) is not abstract. The guarantor can invoke the exceptions arising from the actual agreement of guarantee, ie in casu the agreement between the guarantor and the lessor, if these do not find their origin in the leasing agreement itself. The guarantee can as the occasion arises also be limited to, for example, some months of rent.

In case of a guarantee (borgstelling/ caution) on first demand, the guarantor needs to pay the lessor at first request, so again without the lessor providing any proof of non-payment or default of the lessee. The difference with the independent guarantee is that the guarantor under a borgstelling/ caution can afterwards exert the exceptions from the lease relationship, ie those that the lessee himself can exert. When the occasion arises, the guarantor can also try to recover the sums from the lessor, whom he has paid (as the case may be wrongfully).

In case of a several guarantee ('hoofdelijke borgstelling'/ 'caution solidaire') the guarantor can also renounce from the right to demand the lessor to sell off the lessee first.

In practice, the terms guarantee ('garantie') and guarantee ('borgstelling'/ 'caution') are at times used indiscriminately: one speaks about garantie whereas one intends a borgstelling/caution, and vice versa. In addition, it does not help either that in English the same word 'guarantee' is used for both types…Considering the different judicial consequences, however, caution is essential.

The figure of the 'mother guarantee', 'parental guarantee' or other similar indication, is as such not regulated separately in Belgian law. In practice, different forms are possible. A company associated with the lessee or a company controlling the latter can be prepared to act as a guarantor of the obligations of this lessee under the lease contract, as the case may be limited to a certain amount and whether or not appealable at first request. In this case the mother guarantee is characterised as a guarantee (borgstelling/ caution) at first request. The mother company could also act as an independent guarantor of the obligations of the subsidiary/ lessee. In other cases the mother guarantee only takes the from of a unilateral obligation (not to) perform certain acts, such as controlling the lessee's cash resources (comparable to a cash deficiency-declaration).

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