It is a standard requirement that if you enter into a commercial lease, you are obliged to provide to the landlord a security deposit.
The landlord may require the security deposit in the form of a bank guarantee or cash.
A bank guarantee is a guarantee issued by your financial institution to your landlord guaranteeing the landlord that the bank will pay the cash to the landlord in the event that the landlord makes a valid claim against the guarantee. The bank will hold your cash in a secured account until the earlier of:
- the date that the bank guarantee expires (if the bank guarantee has an expiry date)
- the date that the bank guarantee is returned to the bank (after the landlord has returned it to you following termination of your lease)
- the date that the landlord makes a claim against the bank guarantee. In this instance, the cash will be paid to the landlord.
Your bank will charge a fee for issuing the bank guarantee. It will also take some time for the bank to prepare the bank guarantee which can delay lease commencement.
If you pay a cash security deposit, unless you are entering into a retail lease, the cash will be held either by the landlord or the landlord's managing agent until the lease is terminated or the landlord needs to call upon the cash to fulfil an obligation that you have failed to fulfill under the contract.
Providing a cash security deposit avoids the hassles of paying the fee to the bank and waiting for the bank to set up and issue the bank guarantee. However, you are putting your cash in the hands of the landlord or the landlord's managing agent who will manage your money. In the event that the landlord is holding the cash and misuses the cash, you may have to commence proceedings against the landlord to recover your money. You may not be successful in doing so if the landlord doesn't have sufficient funds to refund your cash.
Whilst a bank guarantee may be more of a hassle, it offers security in that your money will be held by the bank until the landlord makes a claim. If the landlord makes a claim, you will likely be notified by your bank and if you feel that the claim is not valid, you could contact your legal representative to try to put a stop to the claim before the claim is processed by your bank.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.