Bank Guarantees v Security Deposits: Which is Better for Landlords?

August 24, 2018

The choice of security under a lease is an important decision for a landlord. If a tenant defaults or breaches its obligations under the lease then the landlord can call upon the security (being either a security deposit or bank guarantee depending on the terms of the Lease).

Which security suits your needs – bank guarantee or security deposits (cash bond)?

Apart from personal guarantees, the choice of security under a lease commonly boils down to two options: an unconditional bank guarantee in favour of the landlord or a cash security deposit (also known as a bond).

A bank guarantee is a hard-copy document whereby the bank promises to pay the landlord if the tenant defaults under the terms of the lease (e.g. if the tenant fails to pay rent).

By contrast, a cash bond is the tenant’s money held on trust by the landlord until such time as the landlord may be entitled to call upon the security deposit in the event the tenant defaults.

The bank guarantee is a third-party guarantee, which means is neither the landlord nor the tenant’s document, but a document of the bank. When a bank guarantee is called upon it is the bank’s money being paid, which cannot be “clawed back” by creditors of the tenant. Contrast this with a cash bond paid by the tenant, which creditors can claw back as a preferential payment if the tenant goes under.

Furthermore, a cash bond must be readily identifiable (in terms of any book-keeping) if a dispute arises or when the lease ends. In this way, a bank guarantee is “neater” as the landlord only has to keep the original paper guarantee safe.

If you are a landlord and need advice or a lease drawn up so as to maximise your protection, please contact our experienced property and commercial team today.

Important Notice:
 This publication is provided as general information only and should not be considered or relied upon as legal advice. The law is complex and you should always obtain specific legal advice about your circumstances from a qualified legal practitioner. If you require legal advice, please contact our office to see how we can help.