Landlords of commercial, industrial and retail premises will usually require some form of security from a tenant, in order to protect themselves where a tenant defaults under the lease.
There are various forms of lease security that a landlord my request; which are summarised below:
1. Bank Guarantee
This form of security is preferred by landlords because it is a third party undertaking from an entity of substance, and the bank is required to honour any request to draw-down on the bank guarantee, without the need or requirement to obtain the approval of the tenant.
This type of security is also unconditional and lasts for at least the length of the lease plus an additional six (6) months following. It is however possible to obtain a bank guarantee without an expiry date, which varies depending on the bank. A bank guarantee will also, where it does not have an expiry, survive the tenant’s insolvency, so in this instance there is limited risk to a landlord that any draw-down of a bank guarantee will be clawed-back as a “preference payment” in an insolvency situation.
2. Cash Deposit/Bond
Landlords do not favour cash deposits because of the administration required for the landlord (or managing agent) to open and administer an account, the funds are actually held jointly on behalf of the landlord and the tenant. This means that in the event of the tenant’s insolvency, a claim can be made by the liquidator/administrator to claim the funds back, even if the landlord properly drew on the cash deposit (for lease breaches) prior to the tenant becoming insolvent.
In regard to retail leases, the Retail Leases Act 1994 NSW, for example, requires that the landlord (or managing agent) deposit the cash deposit with the Office of NSW Small Business Commission whereupon a retail bond number is issued. In order to make a claim then on a cash deposit lodged with the NSW Small Business Commissioner, the landlord will need to have the tenant sign the claim form. This may not always be possible if the tenant is in dispute with the landlord, or if the tenant is insolvent.
3. Personal Guarantee
Landlords may sometimes require, in addition to a bank guarantee or case deposit, a personal guarantee from director/s of the tenant company. This requires that the director/s and/or shareholder/s of a tenant company to personally guarantee the lease performance and obligations of the tenant. It is important to consider that the personal guarantee is only as valuable as the worth of the individual giving it; in effect, if they own no assets of value, have assets that are not liquid or have assets that are heavily financed, the guarantee may not be worth enforcing. Unlike a bank guarantee, the personal guarantee needs to be enforced in a court by commencing proceedings against the guarantor.
What is the best option in each circumstance may vary, depending on the type of property/lease and the relationship between the parties. It is therefore, important for a landlord to consider carefully as to the type of security to be requested from a Tenant to ensure the landlord’s interest is protected.
Contact Rostom Manookian on 0416 716 960 or email rostom@manookiansolicitors.com, to discuss your leasing requirements.
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