If a commercial tenant defaults on their monthly rental obligations, the landlord is left with a shortfall in rental income required to service outgoings, most importantly including loan servicing.
Yes, the landlord may hold a bank guarantee or Commercial Lease Bond that covers an initial 3 months or so of rent and outgoings (although this amount could be depleted or exhausted by having to use the funds to ‘make good’ the premises), but what about the longer term?
What if the landlord can’t find a replacement tenant? What if the market conditions force the landlord to accept a replacement tenant at a lower monthly rent?
Rental Guarantee Bonds cover any shortfall in monthly rent:
The indemnity period can be up to 24 months; however, the Rental Guarantee Bond will stop paying the shortfall at the expiry date of the defaulting commercial lease agreement, not the new commercial lease agreement.
Yes, providing they are identified as payable under the Commercial Lease Agreement and declared in the application. Generally, whatever outgoings are payable by the tenant/lessee under the Commercial Lease Agreement are covered under the Rental Guarantee Bond.
Rental Guarantee Bonds can be issued for commercial leases of up to 5 years.
Typically, the Commercial Lease Agreement is subject to an annual indexed adjustment. The Rental Guarantee Bond is issued for the initial amount of rental and any covered outgoings. The bond amount will be indexed by the same annual indexed adjustment.
Under the above example, the landlord would have claimed:
For the landlord:
For the tenant:
It depends upon the financial status of the tenant; indemnity period; term of the lease; and the bond amount. This cost is a once only payment upfront that covers the period of the lease.
This is negotiated between the parties. Typically the landlord will incorporate in the monthly rent or outgoings amount.
The landlord must notify of a potential claim within 2 months of the first unpaid monthly rental. This is an important requirement, so that we can maximise any recovery possibilities against the defaulting tenant. Claims must be made within 4 months of the first monthly rental payment default, otherwise the claim may be declined. Once a default has occurred, the landlord must consult us before taking action against the tenant.
It’s important to ensure that any rights of recovery against the tenant are maintained.
No, a new Rental Guarantee Bond needs to be issued in respect of any replacement tenant.
Insurance Bonds have largely been applied to the corporate sector. Several more insurers have entered the market more recently, with a focus on the small-medium sized business sector. The insurers are leading, credit rated Australian or global brands licensed to act as an insurer in Australia. There’s no reason to differentiate between the credit worthiness of bank or insurer issued ‘sureties’.
It’s largely an awareness and education process, however, ultimately it’s at the beneficiary’s discretion whether or not to accept an Insurance Bond.
Having said that, it seems rather shortsighted that a beneficiary will happily place $5M, $10M, $25M Property Insurance (‘short tail risk exposure’) or indeed, $5M, $10M, $25M Public Liability Insurance (‘long tail risk exposure’) with an Australian Prudential Regulatory Authority (APRA) approved and licensed Australian insurer, yet, question the security of the same insurers over a $50K, $100K or $250K+ insurance bond. APRA is the same government authority that also approves and licenses Australian financial institutions. Insurers and financiers are similarly regulated.
Commercial Lease Bonds applications will be assessed within 3 business days from the receipt of all necessary documentation.
We’ll advise the insurance broker if the applicant has been successful or otherwise.
If the applicant wishes to proceed we must receive ‘cleared’ funds before issuing the insurance bond.
Yes, if you do not use the bond and return it within 30 days of issue, we will refund the premium paid, less the non-refundable $550 (including GST) administration fee.