Is a Bank Guarantee safer than a Security Deposit?
If you are entering into a commercial or retail lease, you will need either a security deposit or bank guarantee. A security deposit is a cash bond whereas a bank guarantee is an undertaking from a bank or credit union to guarantee payment of the amount to the Landlord in case of Tenant default. Bank guarantees have been growing in popularity as it can be argued that they are safer for both Landlords and Tenants.
There are fees associated with setting up a bank guarantee as well as the several weeks it typically takes for a bank to set and issue the guarantee; this is why cash deposits are a more popular form of security for Tenants and Landlords wanting to finalise a Lease quickly. That being said it is important for both parties to understand the additional security a bank guarantee provides over cash.
Tenant insolvency
A cash bond is considered trust money held for the benefit of the tenant. If the tenant were to become insolvent because it has entered administration, then the appointed liquidator responsible for managing the tenant’s financial obligations may recover the cash bond from the lessor. This is known as a ‘preference payment’. During this process, the appointed party may also seek to recover whatever part of the bond that may have been released to the lessor right before the tenant became insolvent.
In contrast, if the landlord has a bank guarantee and uses it before the tenant becomes insolvent, they do not have to worry about the possibility that these funds will be recovered as a preference payment.
Theft of bond from Agent or Landlord!
We were almost hesitant to include this point as we don’t want to imply that it happens BUT Tenants need to remember that you are putting your cash in the hands of the Landlord or the Landlord’s managing agent. In the event that a Landlord is holding 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.
Our team has also been involved in a situation wherein we have taken control of a tenancy where the previous real estate company closed, and the former director ignored all legal demands to transfer the security deposit. It is a very lengthy process to recover these funds and can become expensive if legal services are required. (Please let us emphasise that this is an extremely rare occurrence.)
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 it is processed.
* Please note that this blog post represents the views and options of Modo Property and cannot be taken as legal or financial advice. We recommend all Tenants and Landlords speak to their legal representative to receive advice on lease security based on their own situation.
