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) to perform 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 ease of transacting. 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 .

Bank Guarantee for Lease vs. Cash Bonds in Commercial Lease Agreements

When securing a commercial lease for a commercial property, both landlords and tenants must decide between using a bank guarantee for the lease or providing cash bonds. Each method has its own implications, costs, and benefits, affecting financial security, cash flow, and risk management.

What Is a Bank Guarantee for Lease?

A bank guarantee for lease is a commitment from a financial institution to cover unpaid rent or damages in the event the tenant fails to meet their contractual obligations under the lease agreement. It acts as a commercial lease bond, ensuring the landlord receives a guaranteed payment.

Benefits of Bank Guarantees

• Business Banking Team Support: Banks assess the tenant’s financial situation and only issue guarantees to credible parties.

• Guaranteed Payment: If the tenant breaches the lease, the landlord receives payment through the bank, reducing financial risk.

• Flexibility in Cash Flow: Unlike cash bonds, the tenant doesn’t need to provide a large upfront sum, preserving liquidity.

Drawbacks of Bank Guarantees

• Ongoing Fees: Banks charge maintenance fees for the guarantee, impacting the tenant’s budget.

• Expiry Date Issues: If the guarantee expires before the end of the lease, the landlord may lose protection.

• Collateral Requirements: Some banks may require collateral, increasing the financial burden on the tenant.

Cash Bonds in Commercial Lease Agreements

A cash bond involves the tenant paying a cash deposit to the landlord or property manager as a security deposit. The bond can be accessed if the tenant breaches the lease, such as by failing to pay rent or causing property damage.

Advantages of Cash Bonds

• Immediate Access to Funds: If the tenant defaults, the landlord can access the bond directly without waiting for a bank process.

• Interest Earned: Depending on the agreement, the cash bond may earn interest, potentially benefiting the tenant.

• No Expiry Dates: Cash bonds remain intact until the lease concludes, avoiding renewal issues.

Disadvantages of Cash Bonds

• Upfront Cash Requirement: Tenants must provide a lump sum, impacting cash flow.

• Potential Disputes: Disagreements may arise over how much of the bond should be returned at the end of the lease.

• Risk of Mismanagement: If the property manager mishandles the bond, the tenant may face difficulties in recovery.

Personal Guarantees: An Alternative Approach

In some lease agreements, landlords may also request personal guarantees from tenants. This means that the tenant is personally responsible for the lease obligations, providing additional security.

• For Landlords: Personal guarantees offer a safety net if the tenant defaults.

• For Tenants: It increases personal financial risk but may reduce the need for a large cash bond or bank guarantee.

Key Differences Between Bank Guarantees and Cash Bonds

• Payment Structure: A bank guarantee involves a third-party financial institution, while a cash bond is a direct payment to the landlord.

• Cost Implications: Bank guarantees involve ongoing fees, while cash bonds require a one-time payment.

• Financial Flexibility: Bank guarantees preserve tenant cash flow, while cash bonds tie up funds for the duration of the lease.

Choosing the Right Option

• For Landlords: Consider the tenant’s financial stability, the length of the lease, and the potential for non-payment.

• For Tenants: Assess the financial impact of providing a cash bond versus paying ongoing bank fees.

Bottom Line

Choosing between a bank guarantee for lease and cash bonds in a commercial lease agreement depends on financial circumstances, risk tolerance, and the specifics of the lease. Landlords seeking immediate security may prefer cash bonds, while tenants looking to maintain cash flow may lean towards bank guarantees. Understanding the terms, including ongoing fees, personal guarantees, and potential expiry dates, is essential in making an informed decision.

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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