Most commercial leases require a security deposit or bank guarantee – both are types of deposits that the landlord holds as security for the tenant occupying the property. If the tenant defaults on the lease or damages 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 and looks at what an “unconditional bank guarantee” means.
What is the Difference Between a Security Deposit and a Bank Guarantee?
A security deposit is typically a cash bond. For retail leasing matters, this is usually held by the government department in each respective State and Territory in Australia responsible for administering retail leases. A landlord must lodge the deposit within a certain time after executing/commencing the lease. Though in Queensland, for example, the retail lease legislation has no such requirement and agents or solicitors can hold cash bonds in their trust account. For commercial leasing, there is no requirement to lodge the security bond with any government agency and the landlord can hold the cash bond as it sees fit.
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 the tenant’s notice or consent) if the tenant breaches the lease or damages the property. The landlord can draw down on the bank guarantee to repair the property or bring rental arrears up to date.
Which is Better?
The trend tends to be towards bank guarantees rather than cash bonds, particularly for larger amounts. One reason for this is where retail leases are concerned, it dispenses with the administrative requirements of lodging the bond.
There is also an argument that a bank guarantee is more secure if the tenant goes into bankruptcy (for a personal tenancy) or liquidation (for a corporate tenant). Importantly, though, the process of obtaining a bank guarantee can be an administrative headache for a tenant and take some time, depending on their other financial circumstances.
What is an “Unconditional” Bank Guarantee?
In commercial (and retail) leasing, it is common for a landlord to request an “unconditional” bank guarantee. This means that when providing the bank guarantee, the tenant is making a promise to the landlord that if certain events specified in the lease occur, the landlord can draw down on the bank guarantee regardless of any other dispute between them.
Consequently, the landlord should be able to draw down on the bank guarantee under any circumstance. However, the case of Universal Publishers Pty Ltd v Australian Executor Trustees Ltd  NSWSC 2021 examined these issues and found the answer is not quite so simple.
In that case, the tenant brought an urgent injunctive action against the landlord to stop them drawing down on the bank guarantee, alleging that there had been no breach of the lease. The tenant was successful, with the court referring to the lease and noting it was a genuine dispute between the parties as to whether the landlord could call on the lease.
If the breach had been clearer, the decision might have been different.
If you are a landlord or a tenant and want to know about whether a security deposit and/or lease is more appropriate for your circumstances, get in touch with our commercial leasing lawyers on 1300 544 755.