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Are you a small business that is looking to enter into a commercial or retail lease? If so, you will likely need either a bond or bank guarantee. These are both financial safety nets for landlords. Specifically, they guarantee a landlord’s rental income if a tenant cannot pay their rent. However, bonds and bank guarantees have differences that might make one more attractive for landlords or tenants. This article will explain what those differences are.

What Is a Bond?

A bond is a sum of money that a tenant must pay before entering into a lease agreement. Tenancy Services in New Zealand usually holds the bond to prevent the landlord from using this money fraudulently. The bond, calculated by a certain number of weeks’ rent, functions as a safety net for the landlord. For instance, a tenant may not pay their rent or damage the rental property. A landlord may then have the right to claim money from the bond to cover their costs. Specifically, a landlord can make a claim through an application with Tenancy Services at the end of the lease. If Tenancy Services approves their application, they will grant either part or the whole of the bond back to the landlord. Additionally, the tenant will receive any remaining funds from the bond at the end of the tenancy. Therefore, bonds encourage you to comply with your lease’s obligations. They also protect your landlord from financial loss if you do not meet those obligations.

What Is a Bank Guarantee?

A bank guarantee is another type of security that ensures you meet the rental obligations you undertake. As the name suggests, your bank can offer a guarantee to the landlord. A bank guarantee is a form of third party security. It allows landlords to draw funds from your bank if you do not meet your lease agreement obligations. Most commonly, landlords use bank guarantees when tenants do not pay their rent or damage the property.

A landlord can call upon bank guarantees at any time. They also do not need to advise you before calling upon a bank guarantee. 

Differences Between Bonds and Bank Guarantees 

Insolvency

As a tenant, there is a risk of becoming insolvent while under a commercial or retail lease. If this happens, you will need to undertake different procedures when dealing with either bank guarantees or bonds. If you have paid a bond and you become insolvent, creditors may try to claim the bond back.

By contrast, if you have a bank guarantee, creditors cannot claim that money from the bank. This is because a bank guarantee is a third party guarantee.

Security

Another key difference is that bank guarantees require you to provide security to the bank, while bonds do not. The security for a bank guarantee might be cash, a mortgage or security over a certain asset. Additionally, a bank may also charge a fee for providing a bank guarantee. On the other hand, bonds merely require that you deposit the amount your lease agreement specifies to Tenancy Services.

Which Is Better?

Both options come with their own set of benefits and drawbacks. Landlords generally favour bank guarantees for commercial lease agreements. This is because it is easier for them to access a bank guarantee to cover their costs. Bonds, on the other hand, take longer to process. Landlords also have to apply to Tenancy Services to receive a bond.

Other Options

In addition to bonds and bank guarantees, landlords have other options available to protect themselves against financial loss. For example, a landlord may ask you to issue a personal guarantee as a tenant.

A personal guarantee is where a business’ directors or shareholders personally guarantee their business’ tenancy. This means that if the tenant cannot pay rent or they damage the property, the directors must use their personal funds to pay instead.

However, note that personal guarantees are not a popular security method. This is because it exposes a business’ directors to payment that may not be their fault. 

Key Takeaways

Bonds and bank guarantees are the most common methods a landlord will use to encourage tenants to meet their rental obligations. These obligations include ensuring that tenants pay on time and do not cause property damage. By using a bond or bank guarantee, the landlord has cash available as a buffer even if a tenant walks away after damaging the property. There are different advantages and disadvantages to using either a bond or a bank guarantee, and most commercial leases will use a bank guarantee. This is because it is a third party guarantee. Bank guarantees are also easier to access than bonds. For legal assistance with tenacy agreements, contact LegalVision’s property and leasing lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Who decides whether my tenancy agreement requires a bond or bank guarantee?

The outcome of the negotiation process, involving both parties, will determine whether your tenancy agreement requires the use of a bond or bank guarantee.

Can I change securities during the tenancy?

As long as both parties to the lease agreements agree, you can change securities during the course of your tenancy.

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