Securing a Tenant's Performance Under a Commercial Lease

Monday November 9, 2020

Securing a Tenant's Performance Under a Commercial Lease

The obligations of a tenant to pay rent, care for the premises and obey the provisions of a lease are secured by the landlord’s ability to terminate for breach and take possession of the premises.

This right of termination affords limited protection as the breaches are usually substantial before action is taken. Ensuing proceedings can be protracted. Therefore, when entering a commercial lease, it is prudent for a landlord to require the performance of a tenant’s obligations to be secured by a bond, a bank guarantee and/or where the tenant is a company, personal guarantees from its directors.

The security deposit may be one or more of the following:

1. Bond

This is an amount of money paid by a tenant as a surety to a landlord.   Special obligations are placed on a landlord of “retail premises” (as defined by the Retail Leases Act 2003) requesting a bond. These include, holding the money on behalf of the tenant in an interest bearing account, accounting to the tenant for interest earned on the deposit (although the landlord may keep the interest and deal with it as money forming part of the security deposit), not unreasonably refusing to accept a bank guarantee from an Authorised Deposit—taking Institution (within the meaning of the Banking Act 1959 (Cth)) (ADI) in lieu of another form of security, and returning the deposit to the tenant within 30 days after the lease ends provided that the tenant has performed all its obligations under the lease.

2. Bank Guarantee (or Banker’s Undertaking)

This is a promise made to the landlord by a lending institution to pay the tenant’s debts if the tenant is unable to, up to the guaranteed amount. In return the tenant may have to provide the bank with security such as property or cash in an account. This form of security may be preferred by a tenant as it can free up working capital. The amount of the guarantee is usually open for negotiation and may depend upon the term of the lease, the use of the premises, the level of rent and outgoings, and the tenant in question. The usual amount may range from 3 to 6 months’ rent plus outgoings, but may be as much as 12 months’ rent plus outgoings, depending on the circumstances. The termination date, if any, of the Bank Guarantee should allow for 3 to 6 months after the lease (including any options) ends.

3. Personal Guarantee from Directors of the tenant company or other individuals

This is a promise of one person (the Guarantor) to be liable for the debt or obligation of the tenant if the tenant defaults. The value of a personal guarantee is questionable. Although a director or other guarantor may appear to have personal assets at the start of the lease, the situation may be different at the time of enforcement.

In the current “tough times” for the business and retail sectors, it is imperative that ample security is obtained by the landlord from the outset. Advice should always be sought as attention to detail is critical.