Paying a bond or providing a bank guarantee have been the most traditional forms of security provided at the outset of a lease. There has been a recent increase in security shifting from these traditional models to a commercial lease bond. Commercial lease bonds provide a way for businesses to get security without paying a large cash deposit upfront.
A commercial lease bond is an agreement between the lessee, lessor and a guarantor. The bond acts as security for the lessor in the event the lessee fails to meet their leasing obligations.
How it works
A lease bond involves three parties: the lessee, the lessor and the bond company/guarantor. Instead of paying a deposit or a bond, the lessee pays an annual fee to a guarantor. In return, the guarantor issues a bond in favour of the lessor.
If the lessee breaches the lease, such as failing to pay rent, the lessor can make a claim against the bond. If the claim is successful, the guarantor will pay the lessor up to the bond amount and then will recover the money from the lessee.
Unlike a bank guarantee, lease bonds are typically backed by an insurance or financial guarantee product, rather than a bank facility.
Why do businesses use lease bonds?
The key benefit of a lease bond is that it allows businesses to keep working capital available.
Rather than tying up cash in a deposit or allocating borrowing capacity to a bank guarantee, businesses can retain those funds for operational purposes. This is particularly useful when:
- establishing a new business
- expanding into additional premises
- relocating operations
Lease bonds are often managed digitally, making it easier for lessees, lessors and agents to track lease security in one place. This can be helpful for businesses with several leases, as it allows them to monitor obligations, expiry dates and other changes.
Lease bonds are not available to all businesses. Providers will assess a business’ suitability by looking at their financial position and trading history.
While lease bonds offer flexibility, they also involve ongoing costs in the form of annual fees. Businesses should consider:
- the total cost over the term of the lease;
- any conditions imposed by the bond provider; and
- the lessor’s willingness to accept a lease bond in place of traditional security.
Early legal advice can assist in negotiating lease terms and ensuring the security structure aligns with your business’ broader commercial objectives.
Summary
Commercial lease bonds can be a flexible alternative to cash deposits or bank guarantees. They protect the lessor while helping lessees keep cash available for other business needs.
If you need assistance with a commercial lease bond or would like to understand whether one would be suitable for your business, our Land, Home + Water team can provide you with tailored advice. Please contact Jacki Osmand at jacki.o@morganenglish.com.au
