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If you are leasing your commercial space to a tenant, you should require them to provide security, like a bank guarantee. This will protect you against any potential losses, such as them not paying rent. If your tenant fails to pay rent, you can use the bank guarantee to pay back the rent. This article outlines some important considerations when securing your commercial lease with a bank guarantee.

Australian Trading Bank

You should ensure that your tenant has obtained the guarantee from an Australian trading bank that has an Australian banking licence. Some foreign banks may also have a valid Australian banking licence, so you can accept bank guarantees from a foreign bank in these circumstances.

However, keep in mind that the format of foreign bank guarantees may be different from Australian ones. If a prospective tenant provides you with a bank guarantee from a foreign bank, make sure to review it carefully.

Expiration Date

Typically, to allow for maximum flexibility, a bank guarantee will not contain an expiry date. This way, you can freely use the guarantee if your tenant breaches on the lease.

If a bank insists on including an expiration date for the guarantee, ensure it is at least three months after the length of the lease. This three month time period provides enough time to pursue a tenant who may have breached your lease.

For example, if your tenant fails to pay rent or leaves the property in disrepair, you can enforce your rights and use the bank guarantee within three months after the end of the lease.

Accurate Details

The guarantee should be made out in favour of you as the landlord, rather than another party. This means that you are in the position with the most bargaining power under the agreement. 

To be able to enforce the guarantee, your entity name and details must be recorded correctly.

For example, if your company is leasing the property, then your company name should be spelled correctly. You should also record details such as your: 

  • Australian Company Number (ACN); and 
  • Australian Business Number (ABN).

Alternatively, if you are leasing out the premises in your personal capacity, you should ensure that your name and details are correct. 

The bank guarantee should also accurately describe the property under the lease. The description should include the: 

  • address of the property; and 
  • suite and floor number, if applicable.

Value of the Guarantee

The guarantee should clearly state the amount that is being guaranteed. It should also specify whether or not GST is also being reimbursed.

For example, if the bank guarantee covers three months of rent which equates to $50,000 and GST is covered under the guarantee, the value of the guarantee should be $55,0000. This accommodates for the $5,000 in GST.

Possession of Property

You should hold off on allowing the tenant to move into the property until they have obtained a bank guarantee. You should also engage a lawyer to review it and ensure its validity.

A guarantee can take anywhere between two business days to a couple of weeks to obtain, depending on which bank your tenant uses. 

If you provide your prospective tenant with possession of the property before receiving a guarantee, and they fail to pay rent or damage the property, it may be difficult for you to recover your loss.

Rent Reviews

Often, leases will contain a clause stating that the rent can increase following a rent review. If this is the case, it is likely that the value of the bank guarantee will also increase. 

Here, your tenant will need to obtain a new guarantee reflecting the increased value of the rent following a rent review.

Lease Renewal

If your tenant decides to exercise their option to renew the lease, they will likely need to obtain a new bank guarantee. The previous one may have expired or may no longer accurately reflect the terms of the renewal of the lease. 

Therefore, you may need to swap the original bank guarantee for an updated version which is reflective of the new terms. 

Key Takeaways

When leasing your property to a prospective tenant, obtaining security through a bank guarantee is crucial to protect you from potential losses. The tenant should provide you with the guarantee before commencing the lease and obtaining possession of your property. If there are any changes to the arrangement, such as a rental increase or lease renewal, you should obtain a new bank guarantee. If you have any questions about bank guarantees or need assistance with drafting and executing a commercial lease for your property, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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