Part 2: I am a landlord. Should I use a bank guarantee or a cash bond?

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Table of Contents

• Banking Act
• What are procedural requirements for bank guarantees?
• Risks of accepting a cash bond before a bank guarantee
• Important terms and conditions of bank guarantees
• Conclusion

Welcome to Part 2 of “I am a landlord. Should I use a bank guarantee or a cash bond?”where we will take another look at some of the drawbacks of cash bonds when compared to bank guarantees as a form of security over a commercial lease.

Banking Act

Under the Banking Act 1959, the time before a bank account becomes inactive is 3 years. Any funds that are left in the account will become ‘unclaimed’ funds and are then transferred to ASIC.

As the majority of commercial/retail leases are longer than 3 years, if a tenant gives the landlord a cash bond as security for the lease, and this cash bond is kept in a bank account that lies dormant for a period of more than 3 years, there is a risk that the funds will be transferred to ASIC.

It is worth noting that even though these funds have been transferred to ASIC, they are technically recoverable. The downside of using a cash bond is the potential for added administrative tasks for the landlord to consider. Keep in mind that an account that earns interest or is charged fees is still inactive if no deposits or withdrawals are being made.

What are procedural requirements for bank guarantees?

Due to the heavy administration and number of procedures in banking generally, it can take up to several weeks for a bank to issue a guarantee to a tenant applicant. Problems arise when a tenant needs to move into a premises urgently, either to fit-out the site or for some other reason, and, as such, requests early occupation before providing to the landlord a bank guarantee, instead offering an interim cash bond.

Risks of accepting a cash bond before a bank guarantee

This can be a risky approach for a landlord that accepts a tenant’s request to temporarily provide a cash bond while awaiting approval of the bank guarantee, including:

• It might be less of an incentive for a tenant to follow through with obtaining a bank guarantee if the landlord has already granted early possession;
• If the bank (of the tenant) decides to impose certain conditions that were not previously brought to the landlord’s attention, and to which the landlord does not agree, the landlord will be in a weaker bargaining position having granted early possession;
• There is also the risk (assessed above) of the tenant becoming insolvent prior to the landlord receiving the bank guarantee, which may jeopardise the landlord’s entitlement to the cash bond, which may become vulnerable to a claim from the appointed party; and
• There is the added administrative task of lodging a bond in NSW with the NSW Fair Trading, despite it being for a short period of time.

Important terms and conditions of bank guarantees

It is a common mistake for landlords to become complacent when checking the details of a bank guarantee, yet spend plenty of time negotiating the lease terms. What are the terms of the guarantee? Have a lawyer review them to assess whether they are favourable.

Particular attention should be given to the way in which the lease agreement is described in the guarantee. If you are a landlord, ideally you want the bank guarantee to take responsibility of all tenant obligations, as opposed to simply covering the rent. Also, have your lawyer look over the lease agreement expiration date and check to see that the bank guarantee is at least valid up to this date (and sometimes up to 3 months afterwards).

Conclusion

Make sure you give some thought to the type of security you choose to accept from your tenants. It might also be worth making the receipt of the guarantee a condition for early possession or possession in general. It is also a good idea to set out these requirements of an acceptable bank guarantee in an information sheet.

If you would like a bank guarantee reviewed, lease terms reviewed, or simply find yourself in a leasing predicament and would like high-quality, affordable advice, call LegalVision on 1300 544 755 and get a fixed-fee quote today.