Cash Bond or Bank Guarantee?

It is common practice for a Landlord to request a Tenant to provide security for performance of their commercial lease obligations by way of cash bond or bank guarantee. However, many Landlords accept either form of security without considering the relative advantages and disadvantages of each.

Why a bank guarantee?

A bank guarantee is an undertaking from a banking institution to guarantee performance of the Tenant’s lease obligations. This form of security allows a Landlord to call upon the guarantee without reference to the Tenant once the bank guarantee is presented by the Landlord to the banking institution.

This form of security is very convenient, as it requires no ongoing obligations from the Landlord such as opening a bank account and having to account to the Tenant for interest accrued.

Another advantage of holding a bank guarantee is that the Landlord does not have to consider recent changes to the Banking Act 1959 which have reduced the timeframe before a bank account is deemed inactive from seven to three years.

The main disadvantage of requesting a bank guarantee is the time it takes to call upon. This is normally due to the Tenant or their banking institution’s own administrative procedures which can take days or weeks to finalise. A further important consideration for Landlords when accepting bank guarantees is to ensure that the document contains all of the necessary and correct information.

Why a cash bond?

A cash bond is monies provided by the Tenant, usually by way of bank cheque, to guarantee performance of the Tenant’s lease obligations.

The main advantage of accepting a cash bond is that it is easy to collect and avoids the Tenant having to deal with a banking institution which can delay security being provided.

The primary disadvantage of accepting a cash bond, where a lease is subject to the Leases (Commercial and Retail) Act 2001 (the ‘Act’), is that under section 42 of the Act the Landlord is required to hold the monies on trust, in a bank account that attracts interest. The obligation to deposit the cash bond is arguably immediate, notwithstanding the possible intention of the parties to replace the cash bond with a bank guarantee at a later date.

Another drawback is that the Landlord needs to be proactive to ensure the cash bond is not declared unclaimed under the Banking Act 1959. If a bank account has had no withdrawals or deposits within a three year period the account will be deemed inactive and the monies will be transferred to ASIC or the Commonwealth. Although the monies are not lost, recovery can involve a lengthy and protracted process.

If you have any questions regarding a Tenant’s security or require any general or specific commercial leasing advice please contact Bradley Allen Love.