When a tenant is considering entering into a retail lease one of the main things that they will need to address is the provision of security to the landlord.
In the retail lease context, security refers to the financial arrangements that are put in place to ensure that the tenant meets their obligations under the lease, such as paying rent. If the tenant fails to meet their obligations under the lease, the landlord can use the security to cover any losses they might incur.
The two (2) main things for a tenant to consider when turning their mind to the issue of security are as follows:
1. The Amount of Security – this is usually expressed as either a lump sum figure or commonly in terms of a certain number of months (meaning the sum will be the equivalent rent and outgoings value for that period of months). Usually in the range of one (1) to three (3) months. For tenants, the provision of security can often be a significant upfront cost and therefore tenants will generally want to negotiate a lesser sum.
2. The Form of Security – there are two common forms that security can take:
(a) Bank Guarantee – A Bank Guarantee is a formal written document from the tenant’s bank which is given to the landlord and provides a monetary sum assurance that the landlord can immediately cash in to cover any breaches, losses or defaults arising under the Lease. The landlord or landlord’s representative (solicitor or agent) often holds the original Bank Guarantee for the duration of the term of the Lease and returns it to the Tenant upon the expiry of the Lease.
(b) Security Bond – This is the provision of monetary security and is commonly provided via cash, EFT or cheque and can also be used when a Tenant breaches their Retail Lease, for non-payment of monies owed or other defaults related to the Lease.
There are advantages and disadvantages to each form of security and it is important for a tenant to get advice in making this choice. If you require assistance in this area, contact the Leasing team at Baker Love Lawyers.
