When commencing a lease it is usual practice for commercial landlords to require tenants to provide a form of security, with the intention of ensuring performance of the tenant’s obligations under the lease. Predominantly this security will take the form of either a bank guarantee or ‘cash’ bond. The ramifications of either option are significant, and should be considered carefully by both landlord and tenant.
Before addressing the specific advantages of each option however, it is important to note the some of the general rules regarding bond and guarantees, which are set out in Part 7 of the Leases (Commercial and Retail) Act 2001. The significant provisions here are that:
- a landlord cannot require a bond or bank guarantee of more than 3 month’s rent (s39); and
- a landlord may only make a deduction from a bond or bank guarantee where the amount is owing under the lease, and where it is not otherwise prohibited by the Act (s43).
Bank guarantees are a written undertaking from a banking or financial institution, in favour of the landlord, to make a payment on demand where required under the lease. As the guarantee is in favour of the landlord, payment can be made without consultation with the tenant, and theoretically occurs quite quickly (subject to the administrative requirements of the particular financial institution).
For landlords, it is always important to ensure that the guarantee provided by the tenant is properly and sufficiently set out, and you should consult with us to ensure this is the case.
If an appropriate guarantee is in place, this is a low maintenance option and simple option for landlords. Another key advantage of bank guarantees is that, as the security is being provided by a third party, the guarantee is not at risk should the tenant enter into financial difficulty (such as administration or liquidation). Conversely, a cash bond in those circumstances may be considered money held on trust for the tenant, and potentially subject to clawback by the party managing the tenant’s affairs.
As an alternative to a bank guarantee, a ‘cash’ bond is sometimes provided as security by a tenant. This usually takes the form of a bank cheque in favour of the landlord, and has the primary advantage of being immediately accessible, and not subject to potential administrative delays as a bank guarantee may be.
The main disadvantage of a bond is that, for leases subject to the Leases (Commercial and Retail) Act, a landlord is required under Section 42 to hold the funds on trust for the tenant in an interest-bearing account. In addition, the landlord is also required to account to the tenant for interest earned at the conclusion of the lease. These requirements can be an unwanted and unnecessary administrative burden for landlords, with a bank guarantee often seen as a lower maintenance and more secure alternative.
If you would like to discuss either of these options further with us, please contact Anthony Simpson on (02) 6140 6236, or email [email protected].