Security for Leases – what is a Security?
Landlords ask for security for leases, which you’ll have to pay when entering a lease. The security is an amount – usually 4 or more weeks’ rent – to cover any extra expenses should you break the terms of the lease agreement. For example, if the property is unreasonably dirty when you leave, cleaning may be paid for with the security. If you haven’t breached the lease agreement, your landlord will return the security amount to you at the end of the lease.
There are a few options that you can consider to provide a security. Your landlord might only accept certain types of security based on the type of lease and the amount. Check with them when making your decision.
The three most common forms of security are:
A security deposit, or cash bond, is an amount that is paid directly. It is paid to your landlord or managing agent when you enter into a lease.
If your lease is a commercial lease, you can pay the security directly to your landlord or managing agent. They will hold it for the term of the lease. The exception is if your lease is a retail lease (a type of commercial lease used if you have a shop front). If your lease is a retail lease, your security must be provided to the NSW Retail Bond Scheme. They will hold it during the term of the lease. Your landlord will require your signature to claim the security held, should you break the terms of the lease.
A Bank Guarantee is an unconditional undertaking provided by a bank to your landlord to guarantee payment of an amount if required. In effect, the bank will pay the security amount to the landlord on your behalf if you either break the terms of the lease or have outstanding rent due.
The bank will usually secure this amount by:
- Cash deposit by yourself (if you are an existing customer); or
- Drawing on an existing security (such as the equity in a mortgage).
This can make it attractive to some tenants, as it doesn’t tie up cash in a security deposit.
Third Party Guarantee
A third party can guarantee payment under a lease. Your landlord would be able to recover any monies due to a breach of the lease from the third party. If the tenant is your company, the landlord may require the directors to guarantee the lease. If you are an individual tenant, a third party guarantee might not be accepted by your landlord as a form of security, as it can be costly to enforce payment if required.
It is important to seek legal advice before entering into a lease to determine which type of security is in your best interests. Therefore please get in touch if you have any questions about security for leases, or other property law matters.