What type of security do you have to give the landlord?
Your landlord may ask you for some form of financial security when the two of you are negotiating the lease. This is called the security for the lease. This can often be negotiated by both parties.
It might be a fixed amount or an amount equal to a certain number of months rent. The security may be:
- a cash bond;
- a bank guarantee, which is a promise by the tenant’s financial institution to pay the landlord an amount up to an agreed limit if the tenant breaks any of the terms and conditions of the lease. (The tenant usually has to give the bank some form of security to obtain a bank guarantee)
- a third-party guarantee, which is a promise by a guarantor to pay the landlord if the tenant breaks any of the terms and conditions of the lease.
The landlord can draw on the security bond if the tenant fails to comply with any of the terms and conditions in the lease, or if the tenant damages the property.
If you decide to give the landlord a cash bond as security, the landlord or agent must deposit the bond with the NSW Government’s Retail Bond Scheme within 20 business days of receipt.
The scheme holds the money in trust and deposits the bond in a special account.
The main advantages of giving the landlord a cash bond are:
- it’s held by the NSW Government
- there are no fees involved, so the capital amount is secured
- it’s for a specified amount, unlike most third party guarantees
- it cannot be called on without your agreement, unlike most third party and bank guarantees
- there are approval processes and rules for paying out bond money at the end of the lease which can help keep costs down
- If there's a dispute about who is entitled to the bond at the end of the lease, the parties can access our cost effective mediation service to resolve the issues quickly and release the bond from the Scheme.
The landlord must give the tenant a receipt for the bond and lodge the cash bond with the retail bond scheme within the 20 days.
A bank guarantee is a promise by a bank to pay the “favouree” (usually the landlord) a certain amount of money if they require it. Most of the time the tenant’s bank will ask them for a term deposit of the same amount to be held at the bank. If the landlord claims the bank guarantee, the bank will claim the term deposit.
The landlord has the right to cash in the bank guarantee or draw on it if the tenant breaches the lease or damages the property. The landlord is not required to inform the tenant that they have drawn on the bank guarantee before they do it.
The landlord must return a bank guarantee to the tenant within two months after the tenant completes their lease obligations.
Third party guarantee
A third party guarantee may be given by a guarantor. They may be an individual or individuals, a company or the trustee of a trust.
The guarantee, which may have a financial limit, may be given for the term of the lease or for the term plus any additional terms.