REALWorld Law

Commercial leases

Financial security

What additional form(s) of security can be provided to a lessor to protect against a failure by the lessee to meet its obligations?

Angola

Angola

The lessor may demand in the contract that the lessee provides guarantees, the most common being the following:

  • Personal responsibility by a third party
  • A security deposit for an agreed amount usually equal to six to twelve monthly rents (that the lessor is only required to return after the termination of the lease), and
  • Independent first demand bank guarantee
Australia

Australia

The most common forms of security provided to a landlord to protect against a failure by a tenant include security bonds, bank guarantees and personal or company guarantees. Security bonds are commonly used in residential leases and may be used in small-to medium-sized premises under commercial leases. Bank guarantees are commonly used in commercial leases. Guarantees, which are also commonly used in commercial leases, should be evidenced in writing. 

Belgium

Belgium

The landlord can require a guarantee. Parties are free to determine the amount of the guarantee, and the manner in which this is to be given, for example an amount deposited in a blocked bank account for the duration of the lease. (Irreversible and unconditional) bank guarantees and parent company guarantees are also common.

The tenant is also required by the Civil Code to furnish the rented premises sufficiently. The landlord has first call on the proceeds of a forced sale of furnishings if there are arrears. This obligation cannot be imposed on a tenant who has provided a guarantee as an alternative.

Bosnia-Herzegovina

Bosnia-Herzegovina

The parties are free to contract as they wish. In practice the tenant will normally provide a security deposit amounting to one or two instalments of rent.

Canada

Canada

The most common types of security are guarantees given by either a parent company or key individual, and security deposits given either in cash or in the form of a letter of credit issued by a bank.

China

China

A security deposit of about two to three months' rent and sometimes three months' management fee is standard. A down payment or advance payment for one month's rent is also usually required. If the deposit is not sufficient for the cost of repairs and unpaid utilities, the lessee is usually required to remit the amount within 15 days.

Croatia

Croatia

The parties are free to contract as they wish. The landlord may ask for a bank guarantee or a rent deposit, usually for an amount equal to three months' rent.

Czech Republic

Czech Republic

The parties may agree on any guarantee permissible under Czech law. A deposit of three to six months' rent and service charges or bank guarantee in the same amount is standard.

Under the Civil Code, certain guarantees are automatically provided in favour of the lessor. Where the lessee has defaulted on the rent, the lessor may be entitled to seize certain (movable) assets belonging to the lessee, located on the leased property, as security for payment.

Denmark

Denmark

The Commercial Rent Act does not address the issue and it is left for the parties to decide the security (freedom of contract). Usually a cash deposit for an amount equal to three to 12 months’ rent is provided.

France

France

A security deposit for an agreed amount, usually equal to one rent instalment excluding VAT, but sometimes more, is common. Rents paid in advance, in whatever form and even as a guarantee, bear interest for the account of the tenant at a rate specified by the Bank of France where they exceed the value of two instalments of rent. Therefore, if a rent is payable quarterly and in advance, the landlord will ask for a deposit amounting to one instalment (three months) excluding VAT as the payment in advance corresponds to one instalment. According to article L.145-40 of the French Civil Code, any sum paid in excess (including the VAT) would incur interest at the rate specified by the Bank of France.

Cash security deposits are increasingly being replaced by bank guarantees and/or corporate guarantees (which overall guaranteed amount is not framed by the aforesaid article L.145-40 of the French Civil Code).

Payment of rent and service charges is also often secured by guarantees given by a parent company, another affiliate or by a third party.

Germany

Germany

Most landlords ask for security equivalent to between two and three months' rent, either as a deposit or in the form of a bank guarantee. Parent company guarantees are also common.

Hong Kong, SAR

Hong Kong, SAR

Parties are free to contract as they wish. The lessor may ask for a guarantee from the lessee's parent company or a bank, or require a deposit to be paid (usually only one of these). Deposits for breakages and damage are not normally provided in the case of commercial lettings.

The lessor may ask the lessee to maintain comprehensive insurance cover in respect of third party liability for loss injury or damage to any person or property in the premises whatsoever caused through or by any act default or neglect of the lessee.

Hungary

Hungary

Though the parties enjoy contractual freedom to agree in any form of security, such as bank guarantee, parent company guarantee or cash deposit, the tenant is entitled under the Hungarian Civil Code to challenge any security greater than three months’ rent where the security is excessive, taking into account the lease term, the landlord’s fit-out costs and other business terms of the lease.

The tenant is often required to provide a security equal to approximately three months’ rent either in the form of a cash deposit or an unconditional bank guarantee. Although less frequent, a corporate guarantee from the tenant’s parent company may sometimes be acceptable for the landlord.

The landlord also has a statutory lien on a tenant’s moveable property placed in the leased premises as security for any unpaid rent and costs. The landlord is entitled to prevent the removal of such property as long as its lien remains in effect. If the tenant removes this property without the landlord’s permission and does not provide other appropriate security, the landlord is entitled to demand the return of the property at the tenant’s expense.

Ireland

Ireland

The landlord can require a rent security deposit or request a guarantor to be a party to the lease and guarantee the tenant's obligations.

Italy

Italy

According to law, as a security of the lease obligations, the lessee can be requested to deliver:

(i) a interest-bearing cash deposit, the amount of which cannot be higher than three monthly instalments of the rent. The security deposit is kept by the landlord during the lease and returned to the lessee upon termination of the lease, provided that no damage has occurred to the property and no other obligations are outstanding or

(ii) a “first demand” bank guarantee in the amount agreed upon by the parties (usually in the range of 6 monthly instalments of the rent). The bank guarantee is usually valid for the whole lease term and can be enforced anytime during the lease in case of lessee’s breach of its obligations.

Japan

Japan

The parties are free to agree on the form of financial security to protect against a failure by the lessee to meet its obligations.  The lessor usually requires from the lessee a security deposit (shikikin) in the amount of several months' rent and sometimes also requires a guaranty of the lessee's obligations by a third party, such as the parent company.

Netherlands

Netherlands

The lessor can ask for a guarantee from the lessee's parent company, a bank guarantee or a rental deposit (although usually only one form of security is requested).

Nigeria

Nigeria

Parties are at liberty to agree on protective clauses and provisions that envisage failure on the part of the lessee to meet up on obligations and specific covenants under the lease agreement. The usual instances which may engender the need for protection relates to events such as the lessee flouting its obligations to pay the rental for the leased property and failure of reinstatement or repairs of all damages on the property at expiry or termination.

The forms of security which the lessor may ensure that are in place and provided by the lessee are as follows:

  • Security deposit in a sum to be agreed. There is no provision of law that limit the amount of the security deposit so long as it is reasonable.
  • Personal guarantee of directors of the lessee if it is a corporate entity.
  • Third party guarantee warranting the payment of the rental or damages to lessor’s property;
  • Bank guarantee or performance bond to be provided by the lessee’s bank assuring of the payment of the lessee’s rental indebtedness.
  • Acknowledge of debt document, to be executed by the lessee against default to pay rent;
  • Consent to file report on lessee with Credit Bureau.
  • Lien over stocks for lessees of Shopping Malls.

The kind of commercial lease and the nature of the lessee’s undertaking or business will impact on the nature of the additional security that can be provided.

Norway

Norway

One of the commonest forms of security is for the tenant to provide the landlord with an appropriate form of surety from a parent company, a Norwegian bank or other financial institution. The surety is usually equal to the value of the rent for a maximum of six months and any additional obligations.

Another alternative is for the tenant to pay the landlord a deposit, which is placed in an escrow account with the same bank where the rental payments are deposited. This deposit is normally equal to a maximum of six months' rent.

Poland

Poland

In general, the parties are free to contract as they wish. For residential leases, deposits of one month's rent are common. For commercial leases, it is more common for the tenant to provide a bank guarantee amounting to the equivalent of three months' rent and service charges. A notarial deed involving voluntary submission to enforcement proceedings is also fairly common. This reduces the amount of time it takes to obtain a court order to evict the tenant since the court's role is then limited to verifying the validity of the notarial deed.

A landlord may also seek additional security for less than one year's rent arrears by taking a charge over the tenant's assets at the property (save to the extent that such assets are exempt from seizure).

Portugal

Portugal

The landlord may demand in the contract that the tenant provides guarantees of proper performance, the most common being the following:

  • Security (personal responsibility assumed by a third party)
  • Collateral (value in cash that the landlord is only required to return after the termination of the lease)
  • Independent first demand bank guarantee
Romania

Romania

The parties to the lease agreement are free to choose an appropriate form of rent security. Currently, rent deposits, parent company guarantees and bank guarantees are among the most common forms used in the market. The lease agreement will generally provide for the conditions and circumstances in which the landlord is entitled to claim the deposit or to call on the bank guarantee.

Slovak Republic

Slovak Republic

The parties are free to enter into any guarantees permissible under Slovak law. Under the Slovakian Civil Code, certain guarantees are automatically provided in favour of the landlord. As security for the rent, the landlord of a property has a pledge on movable things located in the leased property and owned by the tenant or by persons living with the tenant in the relevant property, except for things excluded from enforcement of a decision. In addition, where the tenant has defaulted on the rent, the landlord may be entitled to seize certain of the tenant's assets located on the leased property as security for payment.

Spain

Spain

As well as the legal deposit prescribed by law, consisting of a sum equivalent to two months' rent for non-residential leases, most landlords ask for a sum by way of security equivalent to between six and 12 months' rent, either as a deposit or in the form of a bank guarantee. Parent company guarantees are also common via comfort letters.

Sweden

Sweden

Parties are free to contract as they wish. The landlord has a right to require a guarantee, such as a bank guarantee, a guarantee from the tenant's parent company or a deposit.

Thailand

Thailand

In general practice, a lessor often asks a lessee to provide a security deposit or a letter of guarantee. The security deposit or guarantee will normally be returned to the lessee when the lease term expires.

United Arab Emirates - Abu Dhabi

United Arab Emirates - Abu Dhabi

Parties are free to contract as they wish. The lessor may ask for a guarantee from the lessee’s parent company or a bank, or require a deposit to be paid (usually only one of these). Deposits for breakages and damage are not normally provided in the case of commercial lettings.

Although it is common for a landlord to take a security deposit from a tenant, the law does not provide clear provisions on how such deposits must be held, when they can be utilized and when they must be returned. It is important, therefore, to ensure that a lease contains detailed provisions on dealing with the security deposit.

United Arab Emirates - Dubai

United Arab Emirates - Dubai

A landlord and a tenant may agree to various forms of protection, such as a parent company guarantee, a bank guarantee or a security deposit.

Most common is a security deposit. The law specifies that this may be used for reinstatement costs. However, it is not clear whether it can also be applied towards a failure to pay rent or service charge etc. The law does not provide that the security deposit must be held in a separate account. Appropriately drafted leases can entitle the landlord to retain the amount of any interest earned on the deposit.

UK - England and Wales UK - England and Wales

UK - England and Wales

Parties are free to contract as they wish. The landlord may ask for a guarantee from the tenant's parent company or a bank, or require a deposit to be paid (usually only one of these), although the guarantor of one tenant cannot validly act as guarantor for the subsequent tenant if the tenant's interest in the lease is transferred. Deposits for breakages and damage are not normally provided in the case of commercial lettings.

UK - Scotland

UK - Scotland

Rent deposits or parent company guarantees may be provided.

Ukraine

Ukraine

A bank guarantee, suretyship by an affiliated company or a deposit of monetary funds are usually provided by the lessee to secure the lessee's obligations under the lease agreement.

United States

United States

The most common types of security are cash security deposits, letters of credit issued by a bank, and guaranties (which are typically given by either a parent company of the tenant or key individual(s)).

Zimbabwe

Zimbabwe

Parties have freedom to contract in this regard, but it is a typical practice for the landlord to request a deposit in terms of the lease agreement prior to the tenant being permitted to occupy the premises. This is normally the equivalent of one month’s rent. This deposit is normally used to cover the landlord against any damage due to the negligence of the lessee or to set off against any rental due.

In terms of the commercial Premises Lease Control Rent Regulations, a landlord is not permitted to retain a deposit for more than 14 days from the date on which the lessee vacates the premises.

The landlord enjoys protection for the payment of arrear rental by means of the Landlord Hypothec. The Landlord Hypothec allows the landlord to sell the movable goods of the lessee which are on the leased premises, in the event that the tenant fails to pay the rent. Section 34(3) of The Magistrates Court Act [Chapter 7:10] allows the landlord to approach the court for an order to attach the property based on the hypothec, seizing the movables of the lessee which are on the property, as may be sufficient to satisfy the amount of rent due and in arrear, together with the costs of such application and of any action for the rent due and in arrears.