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.

Personal guarantee

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.

Maintenance

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.

Conclusion

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.

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.
Would you like to get in touch with James about this topic, or ask us any other question? Please fill out the form below to send James a message!

Privacy Policy Snapshot

We collect and store information about you. Let us explain why we do this.

What information do you collect?

We collect a range of data about you, including your contact details, legal issues and data on how you use our website.

How do you collect information?

We collect information over the phone, by email and through our website.

What do you do with this information?

We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.

How do I contact you?

You can always see what data you’ve stored with us.

Questions, comments or complaints? Reach out on 1300 544 755 or email us at info@legalvision.com.au

View Privacy Policy