Leasing 101: Lease Security – Bank Guarantee or Cash Bond?
Leasing 101: Lease Security – Bank Guarantee or Cash Bond?
When negotiating a commercial lease, it is a common requirement that the tenant provide security for performance of their obligations under the lease. In the ACT the amount required to be provided cannot exceed three months’ rent plus GST (and so consequently that amount is frequently what is requested), while in NSW there is no upper limit. This security is commonly provided by way of a bank guarantee or a cash bond, however they aren’t identical and there are important differences.
Bank Guarantee
A bank guarantee is an undertaking from a bank that, on demand from the landlord, the bank will make a payment to the landlord up to the amount of the guarantee. The tenant is not required to approve the payment – because the guarantee will have been issued at their request. The bank will simply make the payment without reference to the tenant.
Administratively a bank guarantee is often the simplest option from a landlord’s perspective. The bank guarantee is often simply recorded on a single piece of paper (though electronic bank guarantees are slowly growing in prevalence) and, other than storage, imposes no ongoing obligations. However, when a claim needs to be made against the guarantee as this involves liaising with a bank there will be administrative and other processes that need to be followed that can delay the actual receipt of funds by a few days.
From a tenant’s perspective, there are often initial costs involved in obtaining a bank guarantee and then ongoing fees while it remains active. Guarantees also often take a number of weeks to be prepared and issued, and so can slow down the process of satisfying all the requirements to gain access to the property.
Cash Bonds
A cash bond meanwhile is exactly that – cash paid by the tenant to the landlord as security. Because the security is cash there are none of the fees associated with obtaining a bank guarantee or any of the delays.
Administratively though, the cash bond is more work for a landlord. In the ACT, where a cash bond is provided, the landlord is required to deposit those funds in an interest-bearing account and is required to account to the tenant for any interest earned. As with a bank guarantee it can be claimed on without notice to the tenant, so where the bond is held as cash there is no delay in that process.
In NSW, where the lease falls under the Retail Leases Act 1994, the bond must be deposited with the NSW Government’s Retail Bond Scheme. Under that scheme there are no fees involved for holding the bond. Unlike a bank guarantees or a cash bond in the ACT though, a landlord cannot make a claim against the cash bond without the tenant knowing. Instead, the landlord and tenant either need to agree over the payment or, if the claim is made solely by one party, the other can dispute the claim.
If you have further questions or are uncertain about any aspect of the security for your lease, please contact me. I am here to help.