Why a Bank Guarantee?
“The Commercial Real Estate Agent has asked you for a Bank Guarantee, Why?”.
What is a Bank Guarantee,
Simply put, it is a request of your bank to stand as a guarantor on your behalf.
The bank guarantee is a document telling the person or entity that it is written in favour of, that the bank will pay the amount subject to a set of conditions. In the commercial property industry, It is used as security by the landlord, should a tenant default on their lease. In terms of the residential property environment, its the “bond” money.
The Bond money is a residential is essentially drawn upon, in-case the tenant damages the property, however, in a commercial space, the situation is a little different.
In the commercial space the tenant is allowed to make changes to the property, renovate the space, subject to the lease constraints, to your meet the tenant’s business needs, however, a business may sometimes fall on hard times and may default under the lease.
If a tenant defaults under the lease, or does not complete a “make good” at the end of their lease, then, consequently, the bank guarantee pays the over due rent, and/or the “make good” at the end of the lease.
Bank Guarantee Value
Typically, the value will be equal to a minimum of three months rent, so if the tenant defaults for more than 60 days, the Landlord is covered.
The tenant’s bank will “lock” the funds which support the guarantee, that might be with the tenants has account or property or some other surety which meets the banks requirements. Typically, if the bank “locks” a cash account, the tenant will still receive interest on those ‘locked” funds.
From the perspective of the Landlord, the bank guarantee is critical, if things go for wrong for the tenant. Hence, is it imperative the Commercial real estate agent has the document stored effectively, either with the lawyer, or with the tenant’s lease, and perhaps a copy of the document is made for reference.
Do Bank Guarantees “Expire”?
In a perfect world, the bank guarantee will not have an expiry date, however, some tenants require that the document must have an expiry date.
If there is an expiry date, this needs to be monitored by the Commercial agent to ensure the Landlord is always covered. For example, the tenant may still be occupying the property towards the end of their lease, and they may choose to exercise the option on their lease.
The Commercial agent should be ensuring a new Bank Guarantee is obtained which will expire three months post the end of the new lease, thus, keeping the bank guarantees current with the negotiation of the new lease. The Commercial agent, wherever possible keeps the landlord protected.
The Commercial real estate agent, will want to maintain the Landlord as a client for the long term. hence, keep an effective reminder system in place with the expiry date of any bank guarantees under their supervision. Having the date expire after the end of the lease, at least three months, provides the Landlord with funding should the tenant fail to “make good” at the end of their lease or if the tenant simply “evaporates”.
Bank Guarantee Details
The Bank guarantee should be written to credit the Landlord, not the Commercial agent. There should also be a clear and correct description of the property for which the bank guarantee is covering in the lease, including street address, etc.
The amount should be a minimum of three months rent plus the Goods and Services Tax for that three months. Unlike residential bonds, the rent on a commercial property attracts GST and it is a liability to be paid.
Our view, is the best practice is to ensure the bank guarantee is supplied by the tenant and reviewed by a lawyer before they move their business into the property, this means the Commercial Real Estate agent needs to follow this up with the tenant promptly to reduce any delay for moving in. Keeping the Landlord covered at all times; that said, when the lease is up for renewal or the rent is reviewed with an increase.
The Commercial agent should ensure renewal is a reflection of the new rent value. Ensure the tenant is aware of this process by making sure this requirement is in their lease.
Alternatively, if the bank guarantee is too difficult, than a security deposit could be used.
Think of the bank guarantee as a “bond”, when in doubt, check with a legal professional in the area of Commercial property leasing. We hope this article has been useful, feel free to let us know if there is anything we can add or improvements to make. What are your thoughts on Bank Guarantees?
Forte Asset Services