In this fourth segment on how some commercial property investors get ‘lucky’ when buying commercial property we are going to look at the issue of the security provided by tenants. The first three segments are available on our website here.

The guarantee, bond and / or bank guarantee form an essential part of the landlord’s security.  You should ensure that the quantum and mix of the security provided is reasonable in light of the length of the lease, the nature of the property, the standing of the tenant and other commercial factors. 

Once that is done, you need to ensure that your security is real.

Personal Guarantees

It is almost universally expected for the directors of a corporate tenant to provide personal guarantees.  The exception is large stock market listed companies or private companies with impeccable credentials.

Part of your due diligence when buying a commercial property is to ensure that these personal guarantees exist and have been signed (originals at settlement!), the guarantors are the current directors and that the leasing agent obtained an asset and liability statement from the directors.

Rental Bonds

Where a rental bond has been paid by the tenant:

  • You should confirm that the bond has actually been paid;
  • You should identify who holds the funds and ask them to acknowledge that they hold the funds; and
  • You should calculate the current bond amount – allowing for rent increases and the like – and ensure the amount held is correct.

Bank Guarantees

Finally, where part of the security has been provided by bank guarantee, you should:

  • Confirm that the bank guarantee was provided;
  • Identify who holds the bank guarantee;
  • Ensure that the bank guarantee hasn’t expired – and note the expiry date;
  • Ensure that the bank guarantee is for the correct amount in light of rent increases and other changes; and
  • Ensure that the benefit of the bank guarantee is properly assigned to you as purchaser at or after settlement.

After the tenant has defaulted is not a good time be checking that your security is in place or trying to replace lost or expired bank guarantees….

Naturally, if you have any queries in relation to guarantees, bonds and bank guarantees Lewis O’Brien & Associates has the experience and skills to assist.

For those SME tenants and landlords trying to renegotiate leases in the context of Covid-19 we can offer a short summary of the government’s policy here.