- A bank guarantee is different to a cash bond, in a commercial tenancy
- Commercial property manager Wouter Jellema provides case examples
- Obtain independent legal and financial advice before choosing the way to go
Commercial property managers deal with bank guarantees and bonds all the time.
They are the securities under the lease agreement that tenants provide to their landlords at the commencement of their tenancies, and they remain in place until they have vacated and handed over the property to the landlord’s satisfaction.
Security Cash bond
A bond is an amount of money that the tenant pays to a landlord. The property owner keeps the funds in trust during the tenancy as a security under the lease.
When the tenant moves out and satisfies all terms and conditions of the lease, they can have the bond back. In practice, most of the time, some of the funds will be used to complete the ‘make good’ and goes towards the outstanding financials, such as rent and outgoings.
By contrast, s bank guarantee is a legal document that the tenant’s bank provides with the landlord as the favouree.
This document confirms that the bank guarantees that the tenant has this amount of money, and should the owner wish to claim for it, they can. The document sets down the terms and conditions on releasing the funds and if there is an expiry date for the same.
What’s the difference?
Let us have a look at the practical differences between them. Some recent case studies regarding Bank Guarantees directly from the field:
Case study one
In this particular situation, a tenant had to hand over the property to the landlord at a specific date. Due to many circumstances, the tenant only handed over the property one month later than agreed.
Within that time, the bank guarantee was about to expire. The parties agreed to allow the bank guarantee to expire and for the tenant to pay a cash bond in place of the bank guarantee at this final moment of the tenancy.
When eventually the tenant handed over the property, they went to the bank to release their money, and although the guarantee had expired, the bank would not release the funds to the tenant without the authority from the landlord.
Many banks will not accept instructions from a third party, and as a result, the property manager could not assist the tenant, and everyone had to wait for the owner to prepare the required letter, as per the bank’s requirements.
This amounted to an additional three weeks after the tenant vacated before all the paperwork was finalised, which was a surprise as one would have expected that since the bank guarantee expired, the process would be automated.
Case study two
This scenario is a classic example where the tenant handed over the property without fulfilling all their make-good obligations under the lease.
As a new tenancy was ready to commence, there was limited time to provide the tenant with an opportunity to go back and attend to the matter. As a consequence, the owner took it upon themselves to prepare the property for their new tenant.
The previous tenant had a bank guarantee in place that was due to expire, so in an attempt to protect the landlord’s interest, the guarantee was organised to be released. Weeks passed by as the landlord liaised with the bank, using their solicitor to get the funds released to their nominated bank account.
As per the above two case studies, the use of bank guarantees can be complex for all parties involved. I would recommend that the parties of a lease obtain independent legal and financial advice to understand the best option for all involved in the transaction.