Entering into a commercial or retail lease is a big decision and requires a substantial financial commitment. In addition to rent and outgoings, there are other types of security and payment that the landlord may require the tenant to pay before signing a lease. Below, we unpack:
- the types of payments and securities a landlord may ask a tenant to provide; and
- potential risks to the tenant’s existing assets.
Bank Guarantee or Security Deposit
All commercial leases will usually require either a bank guarantee or a security deposit (usually a cash bond), which is a sum of money the tenant provides before (or on) commencement of the lease. Both options require administrative work. Tenants will usually need to lodge a security deposit with the state government for a retail lease. This is not the case for commercial leases.
A bank guarantee will take between 7 to 28 days for the provider to process. Tenants must ensure they plan ahead so that the bank guarantee is ready for the landlord before the commencement date of the lease. Otherwise, the lease may be held up while the bank guarantee is processed.
This security protects the landlord in case a tenant breaches the lease or does not pay their rent on time. The lease will set out the conditions under which the landlord can access the bank guarantee or security deposit and include an obligation on the tenant’s part to ‘top up’ any amount that the landlord has used to remedy a breach.
This guarantee or deposit will usually increase in proportion to any increase in rent annually. However, this can cause administrative difficulties. Parties should then consider when such an increase should be limited to the renewal of an option term only.
The landlord should return the guarantee or deposit to the tenant. The landlord usually keeps the guarantee or deposit until the tenant vacates the property and fulfils any other obligations under the lease (such as any make good clauses).
If the tenant is entering into the lease as a corporate entity (e.g. a limited liability company), the landlord will ask all the directors to provide a personal guarantee. A personal guarantee differs from the bank guarantee and is required in addition to a bank guarantee or security deposit.
A personal guarantee is a promise that all of the guarantors (i.e. directors) will be responsible – either by themselves or with another director – for the debts of the company should it default on rent. Directors should provide such a guarantee with caution as it can place their personal assets at risk (e.g. property, motor vehicles, cash). Before doing so, they should speak with an accountant or financial advisor.
Alternatives to an unlimited personal guarantee in a commercial or retail lease include:
- increasing the security deposit or bank guarantee; or
- requesting a cap for the personal guarantee (e.g. a limit of $10,000).
The rental deposit (or initial deposit) is usually equivalent to one month’s rent which the tenant must provide to the landlord in advance before the lease commences. This deposit is merely security for the landlord of your intent to enter into the lease.
If you are a tenant about to enter into a lease, remember the following:
- The landlord will ask you to provide various types of securities and guarantees, including a bank guarantee or security deposit, a personal guarantee and an initial rental deposit.
- The bank guarantee and personal guarantee have different purposes. If you are entering into the lease as a corporate tenant, the landlord will often require you to provide both.
- If possible, you should avoid providing personal guarantees although, in reality, it may be unavoidable.
Do you have any questions about the types of securities and deposits you must provide? Get in touch with our commercial leasing lawyers on 1300 544 755 or fill out the form on this page.
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