Most commercial leases require the tenant to provide a security deposit or bank guarantee to the landlord as security for the performance of the tenant’s obligations.
These terms will usually also provide that the landlord will return the security deposit or bank guarantee to the tenant after termination of the lease. However, often these terms do not place conditions on the return of the security deposit or bank guarantee such as requiring that the tenant has complied with all its obligations.
This creates a problem if the commercial leasing code of conduct applies to the lease and to the tenant.
Under the code, part of the rent payable by the tenant is to be deferred (unless the landlord and the tenant agree otherwise in writing). The deferred rent becomes payable after the ‘emergency period’ ends amortised over the greater of the balance of the term of the lease and the period of not less than 24 months.
This means that if a lease expires within 24 months after the ‘emergency period’ ends, the remaining deferred rent is still payable amortised over the 24 months. In other words, the tenant may continue to pay the deferred rent long after the lease has expired.
This may create problems for the landlord if the tenant is winding up its business and the terms of the security do not allow the landlord to hold onto the security deposit or bank guarantee until the tenant complies with all its obligations under the lease.
And, even if a tenant is not winding up its business, having to enforce the lease against the tenant or a guarantor is a costly exercise.
This emphasises the importance of having effective (and properly drafted) security clauses.
To find out if your commercial lease protects you, contact me on 0408 954 570 or at email@example.com.
Keep an eye out for further articles. This article is not legal advice and you should obtain independent legal advice to address your specific situation.