As a lawyer primarily focused on Property and Financial matters, clients often ask me: what's better - a bank guarantee or a security bond?  

As with many questions posed by clients, the answer is entirely dependent on who is asking - and in turn, their individual circumstances. 

Let's take a look at the differences.

Who holds the security?

A landlord must lodge a NSW retail lease security bond with the NSW government's Bond Scheme.  Generally, this must be done within 20 business days of the bond having been received.  This will involve paperwork and associated administration - so be prepared!

There are no legislative requirements for a bond to be received under a commercial lease.  Generally, the landlord will deal with the Security Deposit as they see fit, so long as it is repaid in part or in full, as may be required at the end of Lease.

The landlord simply holds the original Bank Guarantee in a safe place until either a claim needs to be made, or it is returned to the tenant at the end of the lease

How is a claim made?

The landlord has the right to either cash in, or draw on the bank guarantee if the tenant breaches the lease or damages the property. 

The landlord is not required to inform the tenant that they have drawn on the bank guarantee prior to taking such action.

If the security bond is covered by Retail Leases Act 1994 (NSW), then the landlord must make an application for payment.  

The Bond Scheme is required to provide notice of the application to the tenant before the bond can be paid out.

Once this notice has been served, the tenant has 14 days to notify the Bond Scheme that they (the tenant) have commenced prescribed proceedings.  If the notice is not received, the money must be paid to the Landlord.

What else to keep in mind?

If a tenant goes under, creditors can potentially claw back a security deposit from a landlord as a preferential payment.  

As an example, one of Holman Webb's landlord clients cashed in a bank guarantee because the tenant failed to pay the rent.  

The tenant was in financial distress, and a liquidator was appointed.  The liquidator contacted our client demanding the money they had claimed under the bank guarantee for non-payment of rent as a preferential payment.  

Had the security been a bond which our client claimed, they may have been liable to pay that money to the liquidator.

Holman Webb argued that the money was not the property of the tenant, but rather the bank which had issued the bank guarantee.  We didn't hear anything further from the liquidator in this matter. 

Conclusion

To circle back around to our original question - if you are a tenant with a retail lease, you might prefer to provide a security deposit to the landlord.  If you are a landlord, then you may favour a bank guarantee.

With this all said, it's risky to generalise - and our key piece of advice on this front is that you should consider seeking legal advice to ensure you have the best solution for your circumstances.

If you do have a query relating to any of the information in this article, or you would like to speak with a member of Holman Webb's Property Group with respect to a leasing matter of your own - please don't hesitate to get in touch today.