A commercial landlord entered into a Deed of Lease with a charitable trust as tenant.  The landlord did not require a personal guarantee from the trustees of the trust, as this is not common practice for trusts. Trustees generally do not want to be personally liable under any contracts the trust enters into.

The trust defaulted on its rent for a period of a month.  The landlord found out that the trust had lost its funding and therefore had no income or assets.  The landlord was left having to clean up and make good the premises at its cost as chasing the trust for the debt would have been a fruitless exercise.

There have always been other options open to landlords about security for non-payment of rent, but they have previously required special further terms being inserted into leases.

The recent release of the Seventh Edition Deed of Lease by The Law Association (previously ADLS) now has built into it some extra options for landlords to consider as security, particularly where a personal guarantee is not feasible.   We highlight these options below.

Personal Guarantee

A personal guarantee involves an individual agreeing to guarantee the performance of the tenant (e.g.: to pay the rent if the tenant defaults).  For example, where a tenant is entering into the lease is a company, the Landlord can require a personal guarantee from the directors of that company.  

Rental Bond

Landlords can require tenants to provide a rental bond as a form of security of payments expected in terms of the lease.

Rental bonds enable the Landlord (or Landlord’s solicitor) to hold a specified sum of money as security for the performance of the Tenant’s obligations under the Lease. The parties can mutually agree to the amount specified, with any interest accruing added to the rental bond amount and treated in the same manner.

Practically, if a tenant defaults in paying a sum of rent or fails to perform their obligations under the Lease, the Landlord can deduct the corresponding amount from the rental bond. Following this, the Landlord would need to notify the Tenant and provide details regarding the expenditure for the purposes of being reimbursed so the rental bond is restored to its initial amount before deduction.

Where a rental bond is provided for on a Law Association Deed of Lease, but no amount is specified, it is set at an amount equivalent to three months’ rent plus GST.

Bank Guarantee

Landlords can require tenants to provide a guarantee from a bank (also known as bank bonds). 

Bank guarantees can protect the Landlord’s interests as they record that the bank will undertake to unconditionally pay the Landlord on demand any sum up to the amount of the bank guarantee. 

This is particularly useful where the Landlord is cautious about the viability of the tenant’s business or broader likelihood of defaulting on payments under the lease.  The amount of the bank guarantee is held by the bank, and generally the tenant will pay interest on the amount held.

The Law Association Deed of Lease enables Tenants to provide a bank guarantee and specify its amount.  If a bank guarantee is provided for but no amount is specified, it is set at an amount equivalent to three months’ rent plus GST.

These can often be used instead of a rental bond where the Tenant may not have the cash to pay an upfront deposit.

Landlord’s Consent

Tenants need to obtain consent to carry out any alterations to the premises and to assign or sublease under the lease.

Unless expressly stated otherwise, the Landlord can impose reasonable conditions when granting consent or approval for matters under the Lease.  In the case of non-structural alterations, the tenant is required to provide plans and specifications for the works.

If a Tenant seeks consent to make alterations to the property which trigger a requirement to upgrade the building more widely, the Landlord may refuse consent unless the Tenant meets all associated costs of those upgrades.

Health and Safety Obligations

Both parties to the lease are obliged to comply with the Health and Safety at Work Act 2015. Practically, this means it is prudent for landlords to ensure they understand their obligations.

Landlord’s entitlements in relation to an assignment of lease

As a condition of granting an assignment of lease, Landlords are entitled to request the same options as referred to above, being:

• Having the new lease personally guaranteed by the directors of the new tenant’s company; or
• A bank guarantee; or
• A rental bond.

The new standard Law Association Deed of Lease includes important protections and obligations for landlords. It is important to understand them and consider which are best fit for your purposes as a commercial landlord.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.