In a challenging economic climate, landlords quickly become aware of the cost and time commitment to recover rent, when tenants have defaulted, from guarantors who have little or no assets.
Often, guarantors have exhausted resources to keep their businesses operating as long as possible. Attempting to recover rental arrears from guarantors in such circumstances often has little to no chance of success. So, what should a landlord ask for, a bank bond or a guarantee?
The bank bond alternative
Bank bonds offer a compelling security alternative to traditional personal guarantees and they have several strategic advantages:
- Enhanced security reliability: bank bonds eliminate concerns about guarantor creditworthiness. While the financial stability of tenants and guarantors can deteriorate over time, bonds from a registered trading bank maintain their value regardless of the tenant or guarantor’s circumstances.
- Immediate liquidity access: as on-demand instruments, bank bonds can be called on immediately when a tenant defaults without proving lease breaches. This provides landlords with rapid access to funds without lengthy legal-based recovery processes.
- Administrative efficiency: bank bonds eliminate the need to pursue guarantors through the courts, substantially reducing collection and legal costs while providing certainty of recovery.
Implementation Considerations
Despite their advantages, bank bonds require careful administration regarding:
- Expiration management: as bonds have defined expiration dates, they require careful monitoring. Landlords must implement robust systems to track renewal dates and ensure continuous coverage.
- Value adjustment: bond values typically align with rental obligations, necessitating updates as a result of rent reviews. Failure to adjust bond amounts when rent obligations have increased can create security gaps.
- Execution discipline: improperly making demand on a bond can expose landlords to substantial tenant claims. Financial institutions typically recover called amounts from tenants or the tenant will have a facility drawn that relates to the bond amount. Precise demand processes are essential.
Tenant Implications
Bank bonds generally impose higher costs on tenants than the provision of a personal guarantee. A tenant may require access to liquid assets to support a bank bond or they will need to draw a facility with their bank that is equal to the bank bond amount. This may affect tenant availability generally and impact tenancy negotiations.
Strategic Recommendation
The choice between personal guarantees and bank bonds should reflect a landlord’s portfolio strategy and risk tolerance. Bank bonds offer superior security and administrative efficiency, which is particularly valuable during economic downturns when guarantor solvency becomes questionable.
For sophisticated landlords seeking to minimise default exposure, bank bonds present a compelling security option that benefits both parties. While landlords receive enhanced payment security, financially sound tenants gain access to properties that might otherwise require more substantial personal guarantees.
By implementing robust bond management systems and clear lease provisions, commercial landlords can effectively mitigate default risk. At the same time, they can expand their potential tenant pool to include otherwise marginal applicants, which is a significant advantage in competitive leasing markets.
