Retail lease bank guarantee: what tenants need to know

When you sign a retail lease, the landlord will almost always ask for security. The most common form is a bank guarantee. Unlike a cash bond, a bank guarantee doesn’t tie up your working capital, but it still comes with costs and risks. Understanding how bank guarantees work in retail leases helps you negotiate better terms and avoid unexpected expenses.

What is a bank guarantee in a retail lease?

A bank guarantee is a promise from your bank to pay the landlord a set amount if you default on the lease. It’s not a loan, but the bank charges fees to issue it. The guarantee amount is usually equal to three to six months’ rent, though some landlords ask for more in high-demand locations or for new businesses.

In Victoria, the Retail Leases Act 2003 doesn’t set a maximum amount for bank guarantees, but it does require landlords to act reasonably. If the requested amount seems excessive, you can push back. Elite Retail Leasing often helps tenants negotiate the guarantee amount down to a more manageable level.

How bank guarantees differ from personal guarantees

A personal guarantee makes you (or your directors) personally liable for the lease obligations. If the business fails, the landlord can pursue your personal assets. Bank guarantees, on the other hand, are limited to the amount specified in the document. Once the guarantee is called upon, the bank pays the landlord, and you then owe the bank.

Personal guarantees are riskier for tenants, especially for small business owners. Some landlords will accept a bank guarantee instead of a personal guarantee, but this depends on your financial strength and the landlord’s policies. If you’re asked for both, it’s worth negotiating to remove the personal guarantee or limit its scope.

Costs and fees of a bank guarantee

Banks charge an establishment fee and an ongoing annual fee for issuing a bank guarantee. The establishment fee is usually a percentage of the guarantee amount, while the annual fee is a smaller percentage. These fees add up, especially if the lease term is long or the guarantee amount is high.

Some banks also require security for the guarantee, such as a cash deposit or a charge over your business assets. This can tie up your capital, which is why it’s important to shop around for the best terms. Not all banks have the same requirements, and some may offer better rates for existing customers.

How to reduce bank guarantee costs

• Negotiate the guarantee amount: Push for a lower amount, especially if your business has a strong trading history or you’re signing a long lease.
• Compare bank fees: Different banks charge different rates. Ask your business banker for options, and consider smaller banks or credit unions if they offer better terms.
• Limit the term: Some landlords will accept a bank guarantee that expires after the first year or two, especially if you’ve built a good payment history.
• Use a security deposit instead: If you have the cash available, a security deposit might be cheaper than a bank guarantee, as it doesn’t incur ongoing fees.

When can a landlord call on the bank guarantee?

The lease will specify the conditions under which the landlord can call on the bank guarantee. Common triggers include:

• Non-payment of rent or outgoings.
• Breach of lease terms, such as failing to maintain the premises.
• Insolvency or liquidation of your business.

In Victoria, the Retail Leases Act 2003 requires landlords to give you written notice before calling on the guarantee, unless the breach is serious (like abandonment of the premises). The notice period is usually 14 days, but this can vary depending on the lease terms. If the landlord calls on the guarantee unfairly, you can dispute it through VCAT.

What happens if the guarantee is called?

If the landlord calls on the bank guarantee, the bank will pay them the agreed amount. You’ll then owe that money to the bank. The bank may require you to repay the amount immediately or allow you to pay it off over time, depending on your agreement with them.

Once the guarantee is called, the landlord may also terminate the lease if the breach isn’t remedied. This is why it’s important to act quickly if you receive a notice. If you believe the landlord’s claim is unfair, seek advice from your solicitor and consider applying to VCAT to recover the funds.

Alternatives to bank guarantees

Bank guarantees aren’t the only option for securing a retail lease. Depending on your situation, you might consider:

Security deposits

A security deposit is a cash bond held by the landlord. Unlike a bank guarantee, it doesn’t incur ongoing fees, but it ties up your capital. Some landlords prefer this option because it’s simpler to access if you default. If you choose this route, make sure the lease specifies how the deposit will be returned at the end of the lease, including any deductions for make good or unpaid rent.

Personal guarantees

If you’re a director of a company, the landlord may ask for a personal guarantee. This is riskier for you, as it exposes your personal assets. If you’re asked for a personal guarantee, try to negotiate a cap on the amount or a time limit (e.g., only for the first year of the lease).

Parent company guarantees

If your business is part of a larger group, the landlord might accept a guarantee from the parent company instead of a bank guarantee. This can be a good option if the parent company has strong financials, as it avoids the costs of a bank guarantee.

Reduced guarantee amounts

Some landlords will accept a lower bank guarantee amount if you provide other forms of security, such as a director’s guarantee for a portion of the amount. This can be a good compromise if you’re trying to reduce costs.

How to negotiate better bank guarantee terms

Negotiating the bank guarantee terms is just as important as negotiating the rent. Here’s how to approach it:

Start early

Don’t wait until the lease is almost signed to discuss the bank guarantee. Bring it up early in the negotiations, ideally when you’re discussing the lease terms. This gives you more leverage to push for better terms.

Use your trading history

If your business has a strong trading history or you’ve been a reliable tenant in the past, use this to your advantage. Landlords are more likely to accept a lower guarantee amount or alternative security if they trust you to meet your obligations.

Offer other forms of security

If the landlord is insisting on a high bank guarantee, offer other forms of security in exchange. For example, you might offer a personal guarantee for part of the amount or agree to a higher rent in exchange for a lower guarantee.

Get it in writing

Make sure the lease clearly states the bank guarantee amount, the conditions under which it can be called, and how it will be returned at the end of the lease. If the landlord agrees to reduce the amount after a certain period, get this in writing as well.

Review the lease with a consultant

Before signing, have the lease reviewed by a retail leasing consultant. They can identify any unfair terms related to the bank guarantee and help you negotiate better conditions. Elite Retail Leasing specialises in helping tenants secure favourable lease terms, including bank guarantee arrangements.

What happens to the bank guarantee at the end of the lease?

At the end of the lease, the landlord should return the bank guarantee to your bank, which will then cancel it. However, this doesn’t always happen automatically. You’ll need to request the return of the guarantee in writing, and the landlord may hold onto it until you’ve completed your make good obligations.

If the landlord claims you owe money (e.g., for unpaid rent or make good costs), they may deduct this from the bank guarantee. If you dispute the claim, you can take the matter to VCAT. This is why it’s important to document the condition of the premises at the start and end of the lease and keep records of all payments.

Steps to recover your bank guarantee

• Request return in writing: Send a formal request to the landlord as soon as you’ve completed your lease obligations.
• Provide evidence of compliance: Include photos, inspection reports, or receipts to show you’ve met your make good obligations.
• Follow up: If the landlord doesn’t respond, follow up in writing and consider escalating the matter to VCAT if necessary.
• Check the lease: Make sure the lease doesn’t allow the landlord to hold the guarantee for an unreasonable period after the lease ends.

Frequently asked questions

Talk to a Melbourne retail leasing consultant

Elite Retail Leasing acts for retail tenants across Australia on new sites, renewals, lease negotiations, surrenders and expansion planning. If any of the above applies to your business, get in touch.

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