Welcome to part 3 of “What are the costs of a commercial lease?” Here we will discuss the relevance of personal guarantees, why landlords sometimes prefer a bank guarantee as security, and what maintenance costs are ordinarily involved in a commercial lease.
For those wishing to enter into a commercial lease by using a company or trust to do so, it is not uncommon for the lessor to require personal guarantees from the shareholders and/or directors of the company as security.
When an individual makes such a promise and becomes the guarantor, and in the event that the company or trust is unable to meet its own obligations, financial or otherwise, he or she becomes legally required to meet all duties as guarantor under the commercial lease.
As the tenant, you should make sure to use the right entity, which is the individual or entity that runs the business. A business name is not a legal entity and therefore the owner of that business name is the individual or entity to be entered on the commercial lease.
Bank guarantees or security deposit
Sometimes a landlord will require a bank guarantee or security deposit on top of the personal guarantee you have already provided. A bank guarantee gives the landlord the assurance that, in the event that its tenant cannot meet its tenancy obligations, the guarantor will pay out the landlord (to the limit of the guarantee) to compensate for the tenant’s failure to meet its obligations under the commercial lease. Bank guarantees are helpful to landlords that want to avoid having to go to court to settle the matter, as it enables them to enforce the payment by alternative means. To get your hands on a bank guarantee, the bank will most definitely ask for some sort of security.
In general, a guarantee or security deposit will equate to the value of three months rent.
If your landlord is demanding that, before entering into the commercial lease, you provide a security deposit or bank guarantee, it would be wise to speak to your property lawyer about negotiating the exclusion of any personal guarantee, as having both may be overly onerous.
In most commercial lease agreements, the tenant will have the responsibility of maintaining the premises on a day-to-day basis, and will be in charge of the general upkeep. For structural repairs, in general these will be the responsibility of the landlord. Of course, the landlord and the tenant can negotiate the duties in any way they see fit, provided both parties agree.
Make sure that your property lawyer looks over the maintenance obligations to ensure you’re not agreeing to something you’re not aware of, or you don’t intend to, such as structural repairs.
And finally, make sure you take photos of any damage in the shop prior to taking possession, as this will avoid disputes down the track as to which party should be responsible for certain damage to the premises. The condition of the premises is usually recorded in a condition report.
There are many costs that need to be considered when entering into a commercial lease. Make sure you consult with a property lawyer about what kinds of costs you’ll have to pay under the terms of your commercial lease. Do this before you sign the lease to avoid taking on financial obligations that you cannot meet.