Securing Tenant Obligations with Bank Guarantees

Wynyard Wood Partner, ARTHUR CHUNG explains why bank guarantees should be the preferred form of security of tenant’s obligations in commercial leases.

The biggest risk faced by landlords in commercial leasing is tenant defaults.  This article summarises the main advantages of bank guarantees over personal guarantees and cash bonds.

  • Bank guarantees are typically issued as on-demand bonds and are as good as cash in the hands of the landlord. That means that a landlord can call on the bank guarantee and the issuer will pay out the secured amount without reference to the tenant.  In contrast, personal guarantees rely on the guarantor’s creditworthiness at the time of default.  There is also the time and cost implications of enforcing personal guarantees which can be avoided.
  • Bank guarantees remain secure if the landlord or tenant becomes insolvent. In contrast, a cash bond held by the landlord becomes landlord’s property (putting the tenant at risk), and if held by a stakeholder in trust for the tenant, is vulnerable to a claim by a liquidator or receiver of the tenant (putting the landlord at risk).
  • Bank guarantees will not tie up the tenant’s cash like a cash bond would. (However, banks do generally require security for issuing a bank guarantee, which may be over the tenant’s property, deposited funds or receivables.)
  • Banks often charge the tenant an establishment fee for issuing a bank guarantee and charge an ongoing service fee. However, unlike a cash bond, there is no administrative burden for a landlord.

Each bank has its own bank guarantee form and the terms can differ.  Also the standard ADLS agreement to lease and deed of lease do not set out the required form of bank guarantee nor address key matters such as the amount to be secured, when the bank guarantee can be called on, how long must the bank guarantee remain in force, and when it must be released.   We therefore recommend that landlords and tenants should carefully check the terms of any bank guarantee used before it is issued and ensure the agreement to lease and deed of lease they enter into adequately address these matters.  If you need assistance with bank guarantees or commercial leasing generally, please give us a call.