In recent times we have witnessed an unfortunate spike in the incidence of companies, some once respectable, suddenly going into receivership, administration or liquidation. This is not only bad news for those directly affected within the businesses, but could potentially also have a damaging impact upon the owners of the commercial and industrial assets.
It is imperative that commercial property owners ensure that their lease documents contain protective mechanisms to secure their financial position in the event that the tenant is unable to meet their leasing obligations.
Most commercial and industrial leases now allow for these three most common instruments: Security Bond, Personal (Director’s) Guarantee and Bank Guarantee. As with anything, they each have their advantages and their limitations. The option chosen by the commercial property owner will depend upon their own risk management style, market conditions, property desirability, leasing knowledge and so forth.
The security bond is the most commonly obtained lease security. Bond lodging and use is governed by the Act and managed by the Small Business Commissioner of South Australia. The maximum amount to be lodged for a commercial bond cannot exceed an amount equivalent to 28 days of base rent. That amount could be inadequate however, when you take into consideration the duration and cost involved with procedures to terminate the existing lease and re-let the property. The bond could be adjusted to match maximum prescribed amount every two years.
The Personal (Director’s) Guarantee is a different type of lease security. Essentially, it is a formal declaration by the person/director to guarantee the business (tenant) leasing performance. It is not always readily obtainable, especially in cases where the tenant is a national or multinational company, Government or non for profit organisation. The other downside may be that the guarantor’s position from the time of lease negotiation could be completely opposite from his/her position today.
The bank Guarantee is one where the assurance of the tenant’s performance is provided by the bank. There are two major types of bank guarantees. One that uses physical assets as a security for obtaining a bank guarantee and one that uses cash for the same purpose. Although it could be a great tool when incorporated properly and used cautiously, the possibility of misuse, negligence and lack of control could be a deterring factor for some prospective tenants. Most of the time, the administrative fees and charges related to the bank guarantee will be the highest of all three.
It is imperative for all parties (the property owners and the tenants) to understand the risks that are involved with each available option and the differences between them.
If you would like to find out more about lease securities, please do not hesitate to contact us.
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