What is a Lease Security and When Do You Need it?

When you enter a commercial lease, your landlord or property manager is more than likely to request some form of security. 

This is the property owners’ way of insuring themselves against the potential of you failing to meet your lease obligations. 

Take a look at what the term lease security covers and how it applies when you rent commercial premises. 

What is lease security?

In the context of commercial leasing, ‘security’ refers to the tenant providing some sort of guarantee or financial contribution that confirms they will meet their obligations under the agreement they have signed. It gives the landlord confidence that if the tenant defaults, whether by failing to pay rent, damaging the property or breaching other lease terms, they have a way to recover any financial losses.

As the tenant, when you sign a lease, the security you offer can take a few different forms. Your landlord may require one or more types, depending on the value of the lease, your business’s background and the overall level of risk.

Types of security Qld commercial landlords may require

There are two main types of security most commonly used in commercial leases: financial security (such as a bank guarantee or bond) and personal guarantees.

         1.Bank guarantees and rental bonds

A very common form of lease security is a bank guarantee or a rental bond.

  • A bank guarantee is a promise from your bank to pay the landlord a specified amount if you default on your lease obligations. It acts like an insurance policy for the landlord, giving them direct access to funds if needed without needing to take you to court first. This is a good option because it helps you manage cash flow, and most major banks will provide bank guarantees if you meet the right criteria. 

 

  • Alternatively, your landlord may ask for a rental bond, which is an upfront cash bond or deposit. This is similar to a residential bond, but usually equivalent to three, four, five or even six months’ rent. The landlord will hold this amount (ideally in a trust account) and can draw on it if you breach the lease. Rental bonds are simpler to arrange than bank guarantees but they represent a large upfront cost.

Take note: As explained by the Qld Small Business Commissioner, in Queensland, there is no legislative requirement for a commercial or retail shop lease security to be held in a particular manner, registered with a government body, a solicitor or other authority. The sum of the security is also not regulated by legislation. Because of this, it’s recommended you consult with a commercial leasing expert who can ensure you’re taking the right steps to protect your best interests before you sign a lease and hand over any form of security payment. 

         2. Personal guarantees by company directors

If the tenant is a company, it is also common for the landlord to ask for a personal guarantee from the company’s directors.

By providing a personal guarantee, you agree to be personally liable for the company’s obligations under the lease. If payments aren’t made, the landlord can pursue your personal assets to recover unpaid rent or damages.

This is a significant commitment and can expose you to personal financial risk. However, it also shows the landlord that you are serious about meeting your lease obligations. In many cases, especially for small or new companies, a personal guarantee is a viable option. However, it is recommended you seek expert advice before going ahead.

Choosing the right form of security

The right form of security will depend on several factors, including:

  • Your business profile: Established businesses with strong financial histories may be able to negotiate lower security requirements.

  • Company structure: If you are operating as a company, you may receive a request for a personal guarantee.

  • Lease value: Higher-value leases often demand more significant lease security.

  • Risk and cash flow: Some tenants prefer to provide a bond to avoid involving their bank, while others prefer a bank guarantee to free up funds.

Before you confirm the type of security that will apply to your commercial lease, take the time to consider the long-term implications. For example, a bank guarantee can restrict your borrowing capacity, while a large bond can impact your liquidity, and a personal guarantee might put your personal assets at risk.

Practical tips for commercial tenants

Before you sign a commercial lease, it is worth clarifying:

  • How much security is required and why

  • Whether the security amount can be reduced/partially refunded after a certain period of good conduct

  • The exact conditions under which the landlord can use the security funds

  • Whether you can negotiate the type of security you provide
  • The specific terms of a personal guarantee

What needs to be covered off in writing as part of the lease agreement, so there is evidence of the security you have provided.

Lease security: Why legal advice matters

Security provisions in a lease can have major financial implications. Once signed, they are legally binding and can be difficult to renegotiate. Seeking legal advice before agreeing to the terms gives you a better understanding of your rights, obligations and any opportunities to negotiate more favourable terms.

At NPR Law, we help tenants and landlords review leases every day. Our team can guide you through the decision-making process, explain your risks in plain English, and make sure you are entering your commercial lease with your eyes open.

Commercial Lease Lawyers in Caboolture, Moreton Bay and Nearby Areas

If you have any questions or would like us to explore your best options for commercial lease security, our team of commercial lease lawyers in Caboolture, Moreton Bay and nearby areas is here to help. Call us on 07 3555 6333 or contact us here  to explore your best options and make informed decisions for your property.