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Shortcomings Of Bank Guarantees For Tenants

View profile for Andrew Beattie
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Although a bank guarantee may be thought of as being an attractive form of security for a tenant to provide to a landlord, primarily because of the covenant strength of the guarantor, there are often significant shortcomings in this type of security.

Bank guarantees are usually offered in the standard terms of the relevant bank and are very restricted.  They seek to limit the bank’s liability to:-

- a fixed period;

- a fixed amount;

- rent only; or

- to financial obligations only.  

The guarantee may be expressed to be entirely personal or it may simply fail to provide for what happens to the guarantee in the event of the sale of the reversion. Some banks are even known to seek to exclude liability in the event of insolvency or receivership of the tenant!   It is also not unusual that a bank will set a limit on its total aggregate liability.

The landlord will expect that security will be provided to cover all aspects of the tenants performance under a lease and possibly the entirety of that performance.   Importantly, the landlord will expect that the security will continue beyond any sale of the reversion if the investment value of the property is not to be adversely affected or a prospective purchaser put off acquiring the property.  

Apart from the specific limitations to the security on offer, bank guarantees tend to be very brief in their terms. They contain little or no protective wording to keep the guarantor on the hook in circumstances where it will be automatically released.  It is extremely easy for a landlord to release a guarantor inadvertently through dealings with the lease, the tenant or any other security and some protective wording is essential in the guarantee.

It is important that the landlord appreciates the shortcomings of standard form bank guarantees in order that they can fully appreciate the security which they have in place and it may often be the case that a landlord would prefer an alternative form of security such as a rent deposit deed, parent company guarantee, or personal guarantee.  

We would recommend that both landlords and tenants seek advice  before agreeing any form of tenant security.