- There are differences between a bond and a bank guarantee.
- Each comes with its own pros and cons.
Cash bonds and bank guarantees each have their own pros and cons.
Partner at Long Saad Woodbridge Lawyers, Sam Saad, explained that the major difference between the two is that a cash bond is where funds are put into a bank account, whereas a bank guarantee is a paper document, usually provided by a bank.
A cash bond will see funds held in a trust, either with a real estate agent, lawyer, or sometimes even with a landlord.
For a bank guarantee, the bank effectively secures the funds that are held by the bank for the landlord, unconditionally, when the landlord holds that piece of paper.
“Effectively, it allows the landlord to exercise their rights over that money that the bank currently holds for the tenant,” said Saad.
The pros and cons
From a tenant’s perspective, Saad said a cash bond is probably preferred. He said it is easier to transfer funds to a landlord than go through the processes of organising a bank guarantee, which also costs a small amount of money.
Saad also noted that “you would have some securities over [the cash bond] if you did go into bankruptcy or liquidation at any point in the future because there is the ability to dispute whether the landlord has the right to that security deposit or not, depending on whether it is an asset.”
“And that’s an argument that the liquidator or receiver would put in the event a tenant goes into bankruptcy.”
Saad noted that, sometimes, bank guarantees will have an expiry date.
“It is important to negotiate and ensure that any bank guarantee that’s given to you, if you are a landlord, does not have an expiry date,” said Saad.
Simon Steenhof, director of The Steenhof Brothers in Perth, echoed Saad’s views.
“Landlords should consider registering a cash bond on the Personal Property Securities Register (PPSR) to ensure the landlord has priority in the event of a lessee going into receivership or liquidation,” Steenhof explained.
“Ensuring there is no end date, or reasonable end date, on the bank guarantee is pivotal. The expiry date should allow the landlord time to work out breaches, obtain quotes for make good work, quantify the loss and damage, and act on the bank guarantee before it expires.”
Gerry Petropoulos, commercial tenant advisor and representative at MOSCOM, said, as a tenant representative, he usually negotiates in favour of rental bonds.
“The two main reasons for this are that there are more legislated protections afforded to bonds which can restrict a landlord’s claim to a bond in the event of a dispute and they do not usually incur any fees,” said Petropoulos.
“Bonds are administered differently in each state and are usually held by a government department, landlord or managing agent,” he continued.
As there are fees involved for the tenant when providing a bank guarantee, Petropoulos shared some tips on how to save on these charges.
“If a landlord demands a bank guarantee, shopping around for the best rates and fees is best. Some smaller lenders charge half of what larger banks offer. Ensuring an expiration date on the guarantee can also reduce the interest rate.”
As bank guarantees are not a standardised document, it is a good idea to request a draft copy of the bank guarantee and ensure the landlord confirms in writing that they approve the draft copy; banks charge substantial fees if a bank guarantee requires to be reissued, added Petropoulos.
“Finally, to ensure your guarantee or bond is returned to you, it is best to understand and perform your obligations up until the end of your lease agreement. Ensure you receive the original guarantee from the landlord or managing agent by running your finger over where it has been signed. You should feel the pen indentation, confirming it is the original copy. Return the guarantee to the bank in exchange for the funds held in deposit.”
~~
Disclaimer: Before making any financial decisions, please do your own independent research, taking into account your own situation. This article provides factual information only and is not intended to imply a recommendation or opinion about a financial or credit product. See our Terms of Use.
