A Bank Guarantee is a form of security that a Tenant provides to a Landlord to give surety that the Tenant will perform to their obligations under the Lease. The terms of a Bank Guarantee can often be overlooked during the negotiation of a Commercial Lease as usually the main focus is on the rent and in most situations rightly so but is there any point in having the highest rent per square metre in the street if your Tenant does not pay the rent and they default in substantial arrears with an insufficient, or even worse, no or an invalid security deposit to lean upon?
We take a look at some items to consider when negotiating and obtaining the Bank Guarantee –
It is important to have appropriate cover if the Tenant was to default and vacate leaving you with an arrears shortfall and potentially a significant make good. Circumstances may call for a 6 to 12-month rent plus outgoings plus GST equivalent if the Tenants finances or its make good obligations are of concern. If a net Lease, it is wise to include outgoings charges into the calculation as often if a tenant does not pay its rent, they typically do not pay their outgoings also. Further make sure that as rent increases, the amount of the bank guarantee increases also as the rent equivalent amount for the first and last year of a 10 or 20-year lease can obviously be quite different.
The expiry of the Bank Guarantee can be critical to ensure that the Bank Guarantee can be called upon at the right time. For example, if a Tenant has a 5-year Lease term and the Bank Guarantee expires on the same day as the Lease term ends, if the Tenant promises to make good during the last week of the term of the Lease yet fails to do so to an appropriate standard you will not be able to cash in the Bank Guarantee after its expiry. Depending on the agreed dates to update the Bank Guarantee, minimum 6 months after the term ends is a fair date for the Bank Guarantee to expire.
Always ensure that the details in the Bank Guarantee are correct including but not limited to property address, amounts and Landlord details. If something is incorrect, it could invalidate/cause problems when cashing it in.
Make sure its original
If you receive a copy of the Bank Guarantee and if for whatever reason the Tenant has the original, they could cancel the Bank Guarantee making your copy worthless!
We hope you found the above of value and please do not hesitate to contact us should you wish to discuss management of your prized asset.