ANZ and Westpac recently teamed up with IBM and shopping centre operator Scentre Group (owner and operator of Westfield shopping centres) to prove that blockchain technology for bank guarantees in commercial leasing transactions is a viable concept. If ultimately adopted, this new technology would look to positively impact commercial property leasing transactions by curbing inefficiencies in the current bank guarantee process.
Most commercial leases require some form of security for the tenant’s performance of its obligations under the lease, and most commonly this is in the form of a bank guarantee issued in favour of the landlord. Some problems encountered in the current system include the physical document management process – where the physical bank guarantee is kept, by whom, and what the storage and management process are. The degree of sophistication and system of management of each landlord differs, and where no system or management is in place, this can potentially lead to original bank guarantees being lost, damaged or stolen.
The demand process under the existing framework may also create impracticality: typically when tenants fail to meet their lease obligations the process is for landlords to call upon the performance of the bank guarantee, which requires the landlord to surrender the original guarantee (along with other required demand documents) to the bank for the claim to be processed.
Under the proposed digital system, a blockchain network would be set up between the tenant, the landlord and the bank to digitise and share information relating to bank guarantees that are in circulation. A digital guarantee once created would be immediately visible to all parties on a central ledger and replace the current process triggered by the receipt of a paper guarantee. This digitalisation would eliminate the need for physical handling and delivery of documents during the issuance, cancellation, amendment or demand process for a bank guarantee.
The new process would allow the guarantee amount to be changed (subject to the landlord’s consent) without the need to retrieve a paper document and go through a bank guarantee “swap” process. The security amount under a commercial lease agreement is commonly subject to change during the life of the lease and digitalisation would ensure compliance is more easily managed.
Digitalisation would also eliminate delays in other aspects such as the process by which the landlord proves its identity to the bank, the physical retrieval and surrender of a paper guarantee to the bank branch and where a paper guarantee is lost. In such instances, the shared blockchain ledger would provide a reliable record of the details and current state of the bank guarantee issued and avoid the risk of problems faced in the drawdown process.
It is important to note that the wording used in the bank guarantee (which defines the terms of the bank’s contractual obligations towards the landlord) would remain important. The landlord would still require the bank guarantee to be made unconditionally, without reference to the tenant, and ensuring payment regardless of whether the tenant has given the bank notice not to pay and without the need for proof of non-performance of the tenant’s obligations under the lease. In this regard, it is also suggested that the form of bank guarantees could be standardised across the various financial institutions as part of the introduction of the new system.
Digitalisation has the potential to create a single source of accurate data for the multiple parties involved in the bank guarantee process and streamline requests for amendments to guarantee details by allowing control to be exerted by one party, namely, the bank that provides the guarantee. While significant time and resources would be required to first create the regulatory and legal frameworks around the implementation of such technology (let alone the technology itself), the proof of concept by the participating parties has shown that a centralised digital bank guarantee register is a viable concept that, once introduced, could only be to the benefit of parties to a commercial lease.
The full whitepaper can be accessed as follows:
Co-written with Ying Tay.