In such transactions, deadlines are clearly defined. In this type of business, the buyer seeks a simple answer to a key question: how to ensure that the seller’s or contractor’s obligations will be fulfilled, or that payment will be made from a security instrument if they are not. This is where a bank guarantee comes into play – a proven mechanism by which a bank assumes the obligation to pay the beneficiary under precisely defined conditions.
A bank guarantee is not reserved solely for construction projects and public procurement. In practice, it is also very effectively used in real estate transactions, especially where there is a risk of delays, unfinished works, encumbrances on the property, or when part of the purchase price is linked to specific conditions – which is often the case in transactions in destinations such as Zadar.
What a bank guarantee is and who the parties are
A bank (banking) guarantee is a written undertaking by a bank to pay a certain amount to the beneficiary, upon request, if the debtor fails to fulfil a contractual obligation. In a typical structure, there are three parties:
- the bank (issuer of the guarantee)
- the applicant (debtor; most often the seller, investor, or contractor)
- the beneficiary of the guarantee (creditor; often the buyer)
It is important for the buyer to understand the difference between who is a “party” to the sale and purchase agreement and who is a party to the guarantee. In a real estate sale agreement, the contracting parties are the buyer and the seller. With a guarantee, the bank also appears as a party, assuming an independent obligation to pay the beneficiary, regardless of the internal relationship between the bank and the applicant.
When a bank guarantee genuinely protects the property buyer
A buyer benefits most when the guarantee is tied to specific and measurable situations. In practice, a bank guarantee is most useful in the following cases:
Purchase of property under construction or completion
If you are buying an apartment or villa that is still under construction or in its final phase, there is a risk of delays or that the quality will not match what was agreed. In such cases, a performance guarantee is often agreed, covering the proper and timely fulfilment of the investor’s or contractor’s obligations. As the beneficiary of the guarantee, the buyer gains real protection, because if the other party fails to perform, the buyer may demand payment up to the agreed amount.
Situations involving deferred payment or staged payments
With instalment payments or payments in phases (e.g. deposit, a portion after completion of structural works, a portion after the occupancy permit), a bank guarantee can act as a “safety valve.” Instead of relying solely on promises or contractual penalties, the buyer receives an instrument that enables payment from the guarantee in the event of non-performance, in accordance with the document’s rules.
Taking over property with the seller’s outstanding obligations
If the seller undertakes obligations such as remedying defects, completing finishing works, vacating the property by a certain deadline, or obtaining documentation, a guarantee can be set up to secure that agreement. This is particularly important for luxury properties, where details (equipment, finishes, systems) represent a significant part of the value.
The most common types of bank guarantees in practice
Although there are several variations, in the context of protecting buyers the following types are most commonly encountered:
- Performance guarantee: covers the proper fulfilment of contractual works and obligations.
- Advance payment guarantee: protects the buyer if part of the funds has been paid in advance and the other party fails to perform.
- Defects liability / warranty guarantee: useful when part of the amount is released after handover, and the buyer wants security during the warranty period.
It is crucial that the chosen type of guarantee matches the actual risk. There is no point in requesting an instrument that does not correspond to the situation or that is disproportionately expensive relative to its benefit.
What the buyer must pay attention to: term, amount, and conditions for calling the guarantee
A bank guarantee only protects the buyer to the extent that it is well drafted and properly integrated into the contract. Three elements are decisive:
Validity period of the guarantee
The term must cover the realistic timeframe for fulfilling the obligations, including possible delays. If the period is too short, the buyer may be left without protection precisely when a problem arises. Ideally, the guarantee period should be aligned with the contractual deadlines and include an additional “buffer” period.
Amount of the guarantee
The amount should be high enough to cover the actual damage or the cost of completing the works, but also reasonable so that the other party can obtain it from the bank. In luxury projects, the amount is often linked to a percentage of the agreed price or to an estimate of the cost of completing the works.
Conditions for payment by the bank
The buyer must check whether the guarantee is “on first demand” or requires proof. A first-demand guarantee usually allows faster payment, as the bank pays upon a formally compliant demand by the beneficiary, whereas guarantees with additional conditions may require more documentation and potentially prolong the process. In any case, the conditions must be clear: who submits the demand, how, within which deadline, and with which attachments.
How a bank guarantee works alongside the contract and escrow solutions
In serious transactions, a bank guarantee is often combined with a carefully structured contract (with precise deadlines, a clear description of obligations, and handover procedures) and, where appropriate, with escrow payment mechanisms. The point is not to pile up instruments, but to create layered protection: the contract defines the rules, and the guarantee provides enforceable financial backing if the other party fails to perform.
A practical criterion: when to request a guarantee and when it is unnecessary
If you are buying a completed property with no additional obligations on the seller’s side, with clean documentation and clear title, a bank guarantee may be unnecessary. However, when there is delayed delivery, construction works, staged payments, or any element that increases risk, a guarantee becomes a tool by which the buyer turns a “promise” into a measurable obligation of a bank.
In the mediation of premium real estate transactions, where reputation matters and amounts are high, a well-structured bank guarantee often accelerates the deal because both sides gain clarity: the buyer knows they are protected, while the seller or investor demonstrates the seriousness of the transaction through a precisely defined instrument and execution deadlines. In any case, concrete steps and conditions are always best aligned through direct communication, including channels such as direct contact.
