Much of the negotiation that happens in commercial real estate revolves around money. When tenant representatives negotiate on behalf of the tenant, some of the important bargaining relates not only to how much rent a tenant will ultimately pay, but certain other costs incurred along the way. Tenants must understand the various costs that both they and their tenant reps may encounter and how they affect commercial lease negotiations.
Cash Bonds or Security Deposits
A security deposit or cash bond, usually the equivalent of one month's rent, is an agreed upon sum of money that is paid to the landlord upon signing a lease. This money is completely separate from the money due for the first month’s rent and is held by the landlord for the duration of the lease. The purpose of the security deposit is often to cover any damage caused by the occupant, any fees if there is a breach of the lease contract, or to cover any rent owed if the occupant falls behind. The money will be returned if none of these incidents occur.
In some situations, tenant representatives can negotiate to have the security deposit used as the last month’s rent if the landlord determines there is no damage and the money would otherwise be returned. Tenant reps normally ensure that this money is held in an interest-bearing escrow account for the tenant.
In a competitive real estate market, landlords want to be sure they are leasing to tenants who will pay. A bank guarantee is one such way a landlord can confirm they are leasing to a trustworthy occupant. This guarantee is a statement from the tenant’s bank which ensures the company is a good risk and that the bank can forward the required monthly payments to the landlord based on the company’s financial condition and banking history. Although a bank guarantee does not actually cost the lessee anything, a landlord gains many benefits from such a statement, and may request one at any time throughout the duration of the lease or while negotiating.
Personal or Director Guarantees
Besides a bank guarantee and/or security deposit, many tenant representatives find that certain landlords also request a personal guarantee. A personal guarantee is an agreement with the tenant stating that they will be personally responsible for any costs or financial losses experienced by the landlord as a result of their occupancy. Some landlords will accept a personal guarantee instead of a security deposit.
Just like a bank guarantee, personal guarantees do not require any money up front; however, occupants who provide them must consider ahead of time what they are agreeing to do. Tenant reps typically recommend negotiating these guarantees so they are capped rather than open ended and contain specifics about the types of losses they are designed to cover, the length of time the guarantee is in effect, and other negotiable details.
Even though two of these three occupant costs do not actually involve an initial transfer of money, tenant representatives will negotiate on terms related to them. Guarantees and security deposits all benefit and protect the landlord. Experienced tenant reps will negotiate terms that are favorable to the tenant's interests, that will allow them to gain good terms in exchange for such costs and guarantees. In doing so, both the lessor and the lessee will be equally protected financially!