The usual forms of security are one or more of the following: –
- Personal guarantee from directors or shareholders of a corporate tenant,
- Cash bond; or
- Bank guarantee
I generally recommend a bank guarantee.
A personal guarantee requires either a voluntary payment by the guarantors or for a landlord to sue the guarantors. Frequently, a personal guarantee proves to be ineffective because if the tenant can’t pay the rent there’s a good chance that the guarantor’s financial position may not be much better.
A cash bond involves the tenant actually paying an agreed amount of money as security for payment of the rent. If the premises are retail premises, the cash bond needs to be lodged with the New South Wales government. In the event of a breach of lease by the tenant, the landlord needs to apply to the government for the bond. As there are usually two sides to every story, commonly the tenant objects to the bond being paid to the landlord so the process for the landlord to get the benefit of the bond is neither quick nor easy.
In contrast, a landlord can require payment under a bank guarantee usually without prior notice to the tenant and the bank will simply pay the amount of the guarantee without question. That is the essence of a bank guarantee. It is an unconditional agreement by the bank to pay the landlord up to a certain amount of money on demand.
Regardless of what form of security a landlord may take, it may or may not be sufficient to fully compensate the landlord if there is a breach of the lease. The starting point for any landlord’s decision whether to lease to a potential tenant or not is to satisfy itself as best it can that the tenant has the capacity to pay the rent. This will ordinarily involve the landlord requiring financial disclosure from a tenant before entering into the lease.
At Everingham Solomons we have the experience and expertise to assist both landlords and tenants with all tenancy issues because Helping You is Our Business.
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