Bank guarantees and bonds: what a landlord will ask for

What a bank guarantee actually is

A bank guarantee is an undertaking by your bank to pay the landlord a stated amount on demand, without asking you first. It is not an insurance policy and it is not a deposit held by the landlord: it is your bank's promise, backed by your money or your facility.

Because the bank carries the exposure, it will want security from you — usually cash on term deposit, or a reduction in an existing facility. That cash is not available to your business for the length of the lease, which is the real cost of the instrument, over and above the annual fee the bank charges to issue it.

How much, and what moves the number

Three to six months of gross rent including GST is the ordinary range. What moves it is covenant strength: a long-established business with audited accounts sits at the bottom of the range, a newly incorporated entity or a business without an Australian trading history at the top, and sometimes beyond it.

The amount is also linked to what the landlord is spending. Where a landlord is funding a significant fitout contribution, they are carrying more risk in the early years and will price security accordingly. Where the incentive is small, there is more room to argue the number down.

Getting it back

Security is not released when the lease expires. It is released when you have vacated, made good, and the landlord has accepted that make good. That gap is where disputes sit, and it is why the make good obligation and the security amount are best negotiated together rather than as separate clauses.

Two practical points worth raising early: ask whether the guarantee amount steps down over the term as risk falls, and ask what the release process is in writing, including who signs off and how long it takes.