Rents on commercial spaces can be very high, and the lease terms tend to be much longer than residential leases—three to five years or longer. So, a key concern for landlords is whether a prospective tenant will be able to keep up with the rent and still be in business by the end of the lease period. That’s one main reason that landlords may require a commercial lease surety bond.
Another reason is that commercial tenants often require the landlord to make significant improvements to a space as a condition of renting it. Landlords who finance those upgrades may be counting on the rent payments from the tenant in order to repay that financing.
A commercial lease bond serves as a financial guarantee to the landlord that the tenant will live up to all of the terms of the bond, which typically include rules regarding rent payments, early termination of the lease, property maintenance, and the like. In other words, it serves as financial protection for the landlord.
Who Needs It?
Not all commercial landlords require tenants to obtain a commercial lease bond. But many do, particularly in larger cities where rents are high or when the tenant is requesting that the landlord make costly improvements to the space. Risk management is a major concern for commercial landlords.
When a bond is required, it’s issued in the name of the owner of the tenant business, not the business itself.
How Does It Work?
There are three different parties to every surety bond agreement—the obligee, the tenant, and the surety. In the case of this bond, the landlord is the obligee, the business owner renting the space is the principal, and the company underwriting and issuing the bond is the surety.
The obligee establishes the required bond amount and the effective term of the bond. In the event that the principal violates any of the bond’s terms and conditions, resulting in a financial loss to the obligee, the obligee can file a claim against the bond to remedy the violation, up to the full bond amount. The surety will pay any valid claim, but the principal is legally obligated to reimburse the surety in full.
What Does It Cost?
The approval criteria for obtaining a commercial lease bond is more demanding than for some other types of financial guarantee bonds because of the degree of financial risk the surety is taking on. In addition to considering the applicant’s personal credit score, the surety may look at personal and business financial statements and the principal’s assets.
Every commercial lease surety bond is different, and premium rates vary greatly. Contact us for a quick quote today.
"Since 2001, I have jumped through hoops every 2-years come bond renewal time. With Absolute Surety and their user-friendly online application form, it was all done in MINUTES! Highly Recommended!!!"
Sean McCabe, Orlando