What is a Bank Guarantee?

Pure Property has had an increase in enquiries for vacant spaces this year which comes with it lease negotiation discussions.  I’m often asked by possible new tenants what is a Bank Guarantee and why do we require one?

A bank guarantee in Australia is a request of your bank to stand as a guarantor on your behalf.

A Bank Guarantee in Australia is used as security by the landlord, should a tenant default on their lease.  In terms of a residential property it would be the ‘bond’ money.  Some commercial tenancies do in fact hold a cash security (or bond) money but a usual preference of a landlord would be a Bank Guarantee.

The ‘bond’ money in a residential lease is essentially held in case the tenant damages the property, however, in a commercial space the situation is remarkably different.  In the commercial space the tenant can make changes to the property or renovate (subject to lease conditions) to meet their business needs.  However, a business may sometimes call on hard times and default under their lease on rent payments. 

Bank Guarantees are generally favoured by Landlords and agents alike as they can be a large amount of money and the process reduces administrative requirements of lodging security deposits.  It can also be argued that Bank Guarantees are more secure if the tenant goes into bankruptcy or liquidation.

A value of a bank deposit guarantee would generally be three months’ rent and outgoings for the lease however it could be much more or less depending on the tenancy and landlords’ requirements.  It is also essential to keep in mind that if you are offering any initial incentives to the tenant that the amount be more than what the incentives that are on offer are.  That way if the tenant doesn’t last longer than the incentive period at least you can get the funds from them for that!

The tenants bank will ‘lock’ the funds which supports the guarantee.  It may mean that the tenant has these funds in an account or assets which the bank can control to meet the obligations of the Guarantee.  The advantage of this is that if the funds are held in an account the tenant can still get the interest on the funds, please note that the Bank Guarantees Fees may apply..

From the landlord’s side it is essential that the Bank Guarantee is held securely which would normally be by their solicitor.

In a perfect world all Bank Guarantees would not have an expiry date but unfortunately this isn’t the case.  It is therefore vitally important to have a professional commercial asset manager looking after your property so that they can keep an effective reminder system to obtain an updated version prior to the expire date.  Also, if an expiry date is required ensure it is at least six months’ after the lease expiry date so that you can finalise the tenancy and make good clauses.  The other important item not to forget is to ensure that you get a new Bank Guarantee prior to granting any extensions on the current lease.

The Bank Guarantee for lease will be written in favour of the Landlord (not the agent).  There should also be a clear and correct description of the property for which it is covering.

Our view at Pure, is that best practice is to ensure that the Bank Guarantee is supplied by the tenant and reviewed by the Landlords solicitor before they commence their lease.

 

For more information, please contact us on 1300 111 776 or send us a message to discuss your requirements.