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If you are entering into a commercial or retail lease, you may need a security deposit or bank guarantee. These types of deposits are held by the landlord as security for the tenant occupying the property. If you are a tenant, and you default on your lease or damage the property, the landlord can draw down on the security deposit or bank guarantee to pay rental arrears or make good damages. This article explains the difference between security deposits and bank guarantees in leasing.

What is a Security Deposit?

A security deposit is typically a cash bond. In retail leasing matters, a security deposit is usually held by the state and territory government departments responsible for administering retail leases. In most of the states and territories, a landlord needs to lodge the deposit within a certain time after executing or commencing the lease. However, this is different in Queensland. There, agents or solicitors can hold cash bonds in their trust account.

In commercial leasing matters, there is no requirement to lodge the security deposit with any government agency. The landlord can hold the cash bond as it sees fit.

What is a Bank Guarantee?

A bank guarantee is an undertaking from a bank or credit union to guarantee payment of the amount to the landlord. The lease will then give the landlord the right to cash in the bank guarantee without your notice or consent, if you breach the lease terms or damage the property. Your landlord can draw down on the bank guarantee to repair the property or bring rental arrears up to date.

Security Deposit or Bank Guarantee?

The trend tends to be towards bank guarantees, especially for retail leases and larger amounts. This is because the process dispenses with the administrative requirements of lodging the security deposit. It has also been argued that bank guarantees are more secure if you go into bankruptcy or liquidation. However, this does not mean that obtaining a bank guarantee is easy. It may take some time and come at a cost.

What is an ‘Unconditional’ Bank Guarantee?

In commercial and retail leasing, a landlord may request an unconditional bank guarantee. This means that in providing the bank guarantee to your landlord, you are allowing them to draw down on the bank guarantee if certain events specified in the lease happen, regardless of other disputes between you. Therefore, your landlord can rely on the bank guarantee you have provided under any circumstances.

However, the case Universal Publishers Pty Ltd v Australian Executor Trustees Ltd  found the answer is not so simple. Here, the tenant brought an injunctive action against the landlord. The purpose of the injunction was to prevent the landlord from drawing down on the bank guarantee, because the tenant had not breached the lease agreement. The court ruled in the tenant’s favour.

Key Takeaways

Your landlord may require a security deposit or bank guarantee, if you are looking to enter a lease with them. There is a difference between security deposits and bank guarantees, so make sure you are across them before choosing on. Once you give your landlord a security deposit or bank guarantee, they may fall back on it in the event you breach the lease terms or damage the property you are occupying. If you have any questions, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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