COVID-19 has had an extraordinary impact on individuals and businesses alike. If, like many other businesses, you have found your business struggling, you may not be able to pay your rent. If this occurs, it is important to understand the implications for you and your business, particularly if you have a bank guarantee or a security deposit. This article will outline these implications and your options.
What is a Bank Guarantee?
A bank guarantee is an undertaking from a bank or credit union to guarantee the performance of the tenant’s obligations under the lease.
It is often calculated based on an aggregate rental amount, such as three months’ rent. A landlord can access the cash in a bank guarantee without providing notice to the tenant. This can happen if an alleged breach of contract occurs. For example, damage caused by the tenant to the premises, or defaulting on rent payments.
What is a Security Deposit?
A security deposit is typically a cash bond.
For retail leases in most states and territories, the landlord needs to lodge the deposit with the relevant state body. They must do this within a certain time after executing or commencing the lease. In commercial leasing matters, there is no requirement to lodge the security deposit with any government agency.
Continue reading this article below the formWhat Happens to Your Bank Guarantee or Security Deposit if You Do Not Pay the Rent?
Usually, if you do not:
- pay your rent on time; or
- not pay it at all
the landlord can call upon the bank guarantee without notice to make up the missing rent. If your landlord does this, you will most likely need to provide a top-up to the bank guarantee or replace the bank guarantee.
However, due to the COVID-19 pandemic, the Federal Government has introduced a mandatory national Code of Conduct (the Code) for commercial leases.
This temporary code prohibits the landlord from drawing on your security (ie. bank guarantee, security deposit or personal guarantee). This means that, if the Code applies to your business, it is unlikely that the landlord will be able to call on your security if you cannot pay your rent or miss a rent payment.
What Do I Do If I Am Struggling To Pay the Rent?
Follow National and State Leasing Updates
As already mentioned, the Federal Government has introduced a Code of Conduct for commercial Leases. The Code will apply to businesses who are eligible for the JobKeeper program and have a turnover of less than $50 million. The Code is being legislated by the states and territories.
Landlords are required to enter into negotiations with tenants to come to arrangements which allow for proportionate rent reduction in the form of waivers and deferrals.
Commercial Discussions With the Landlord
If you are struggling to pay your rent or have already missed payments you should talk to your landlord as soon as possible. You need to come to a commercial arrangement with the landlord to reduce your rent. Write to your landlord setting out how you have been impacted by COVID-19 and seeking either a rent reduction or suspension. Be reasonable in your request. The code requires that any reduction be proportionate to the decrease in your trade.
You may be able to make commercial offers such as a balloon payment. Whether or not this is the right option for you will depend on your financial circumstances and the terms of your lease.
Alternatively, if you have:
- less than two years left on your lease; and
- you are in a position to do so;
consider offering the bank guarantee or the security deposit as payment for the rent. This can provide a good middle ground between you and the landlord. You should do this on the basis that the bank guarantee or security deposit will not be required to be topped up.
Make sure that if you use your bank guarantee, you do not give the impression that you are admitting to having breached the lease.
Continue to Meet Your Obligations Under the Lease
Where possible, continue to meet your obligations under the lease including paying the rent.
Key Takeaways
If you are a business struggling during COVID-19 and you are worried about your bank guarantee or security deposit, you should remember the following:
- if the mandatory national Code of Conduct applies to you, the landlord cannot call on your security;
- you should follow your state’s leasing updates for more information in the coming weeks;
- start negotiations with your landlord as soon as possible; and
- where you can, you should continue to meet your lease obligations.
If you need assistance with negotiating your lease or have any questions about how COVID-19 affects your lease, our experienced COVID-19 legal team can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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