Who holds a commercial property bond?

By Greg Bell

Once you’ve found a tenant for your commercial property, it’s time to start working out the details of your contract. It’s an accepted practice for a landlord to require a tenant to provide a security bond – also known as a commercial property bond. This can help protect you in case the tenant defaults on their lease, by paying you the equivalent of a few months’ rental income while you seek another tenant.

Types of commercial property bonds

A commercial property bond can be either a cash bond or bank guarantee in the amount of anywhere form 1-3 months rent (or more for long-term leases), including the GST. This bond is intended to secure the tenant’s performance under the commercial lease and discourage them from defaulting, as they will forfeit the bond if they do so.

A cash bond is paid by the tenant to you at the commencement of the lease. Depending on what state or territory you own property in, you will either be required to have the cash bond held by a government entity – if not, it may be invested into a separate interest-bearing account. When the lease ends, you’ll be obligated to return the cash bond, together with interest, to the tenant. The exception would be if the tenant broke the lease early, or there are noteworthy damages to the property that can be recovered in accordance with your lease.

A bank guarantee is a document provided by the tenant’s bank to you at the commencement of the lease. The tenant will have provided security to the bank, either in the form of real property or deposits in an account. If the tenant were to default, you would recover from their bank, and they would recover from the tenant.

Selecting and defining your commercial property bond

Your commercial lease should have a specific section that discusses the commercial property bond, including its amount, conditions for holding and repayment, and so on. Depending on who holds the bond (a bank via a guarantee or you as the landlord in an investment account), the ease of arranging and managing this component of commercial property leasing can vary.

A cash bond is fast and easy to organise on the tenant’s end, but means you will have to maintain it. This includes keeping the bank account active, as three years with no activity can cause a bank account to be closed and monies added to the Commonwealth of Australia Consolidated Revenue Fund, making them hard to recover. A bank guarantee can take more time to arrange, but relieves you of the burden of holding and administrating the security and puts the onus on the tenant and their bank.

For assistance with commercial property purchases, contact Ray White Surfers Paradise. We can help you find a property with a good chance of giving you a high return on your investment.

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