It is accepted practice for a landlord to require the tenant to provide a security bond by way of either cash bond or bank guarantee to secure the tenant’s performance under a commercial lease. The amount of the security bond offered by the tenant is usually between one to three months’ rent including GST.
Difference between a cash bond and a bank guarantee
A cash bond is paid by the tenant to the landlord at the commencement of the lease. The landlord is required to invest the cash bond into a separate interest bearing account. When the lease ends, the cash bond, together with interest, must be returned to the tenant, unless the landlord is entitled to recover damages from the bond in accordance with the terms of the lease.
A bank guarantee is a document provided by a bank to a landlord at the commencement of the lease. The tenant obtains this guarantee by providing security to the bank, usually in the form of money in a bank account or security in real property.
The document gives a guarantee to the landlord that the banking institution will pay up to a specified amount of money if the bank guarantee is called upon in accordance with the terms of the lease. If the landlord wishes to recover damages under the lease by relying upon the bank guarantee, they can use the original bank guarantee in their possession and exchange it with the banking institution in return for money. The bank will then enforce their security over the tenant’s bank account or real estate to ensure that they recover that money directly from the tenant.
Terms of security
A commercial lease should clearly set out the amount of the security bond or bank guarantee, the conditions for the use, withholding and repayment of the bond / reliance on the bank guarantee, as well as when the bond or guarantee will be returned to the tenant after the lease has ended.
The lease should also cover the circumstances under which the landlord may retain funds from the cash bond or call on the guarantee. For example, a landlord may be entitled to retain a bond or call on a bank guarantee to recover the costs of repairing damage to the premises or for unpaid rent and outgoings.
Advantages and disadvantages
Both types of security have their advantages and drawbacks. While a bank guarantee may take some time and money for the tenant to organise (cost and turnaround both vary from bank to bank), the landlord is not required to register for this document and it is securely held until the expiry of the lease.
Alternatively, a cash bond can be quicker to organise, but is required to be deposited by the landlord into an interest bearing account with all accrued interest payable to the tenant at the end of the lease. The landlord is required to manage and maintain this separate bank account until the money is released.
Changes to the banking laws
Following recent amendments to the Banking Act 1959, landlords should be aware that bank accounts are now considered “inactive” after 3 years if no withdrawal or deposit is made on an account. This means that if a lease is 3 years or longer and the landlord makes no deposit or withdrawal during this period, ASIC may claim these funds and they can be relocated as unclaimed money to the Commonwealth of Australia Consolidated Revenue Fund. While the funds are recoverable, this can be a difficult and costly process, posing a significant risk to both landlords and tenants.
For this reason landlords should consider only accepting bank guarantees when entering into a new commercial lease unless they are prepared to be extremely vigilant about the accounts in which lease security deposits are held.
If you would like further information or advice about security bonds for commercial leases please contact our office on 02 6280 8899 or email: firstname.lastname@example.org.