We are often asked by tenants, and owners, what is the difference between a Bank Guarantee and a Cash Bond? Putting it simply, either is used by a lessee (tenant) to provide security to a lessor (landlord) for the performance of a lease.

A Bank Guarantee is a written undertaking from a bank or financial institution to pay either the full amount of the security, or part thereof, should the lessee be in default of the lease. It is usually the lessee’s bank that would provide the undertaking. The party to which it is made out to, referred to as The Favouree, would present the written document to the bank for payment when wanting to make a claim. The period for which the guarantee is provided can be unlimited or have an end date. If it is the latter, no earlier than 3 months after the end of a lease would be appropriate in most circumstances. That period of time allows for all end of lease matters to be finalised.

A Cash Bond is simply that, an amount of cash that the lessee provides to the lessor as security for performance of the lease. There is no strict amount although we see the calculation typically ranging from 3 to 6 months rent + outgoings if applicable, + GST. The funds would typically be held by the lessors managing agent in its trust account, although the lessor is also entitled to hold the funds unless stipulated otherwise in the lease.

What type of security is best?

It really depends on the situation. Some lessors prefer a cash bond for its simplicity and fluidity to transact. Others however prefer the added security a Bank Guarantee provides.

Whilst claiming a bank guarantee can be cumbersome, it is basically as good as cash. The bank providing the undertaking cannot refuse to exchange it for cash when presented by The Favouree. One example of when it may be presented for instance would be where a lessee is in arrears or has been placed into liquidation.

With regards to the latter, typically what happens when a company is placed into liquidation or receivership and premises have been leased is as follows:

• The Liquidator or receiver would write to the lessor or its managing agent and disclaim the lease. In other words, all bets are off.
• Depending on the situation, the Liquidator or receiver may keep the lease on foot if there is a chance that the company could be sold.
• The Liquidator or receiver would seek access to the premises to asses if there are any assets that could be sold.
• The Liquidator or receiver would review the type of security that has been provided for the performance of the lease. If it is a bank guarantee, the lessor is usually entitled to retain the guarantee and keep the proceeds once claimed. If a cash bond is in place, it would typically be treated as a preferential payment to the lessor which must be returned to the liquidator.

For this last reason alone, our view is that a Bank Guarantee is the best form of security a lessor can have from the lessee.

Written by: Brad Sheppard, Managing Director