Security deposits and guarantees in a commercial lease
Most commercial leases require security: a cash deposit, a bank guarantee, a personal or director's guarantee, or a mix. For landlords, security is only as good as its drafting. For tenants and guarantors, it is a liability that can outlast the business.
The usual forms of security
- A security deposit: cash paid to the landlord and held for the term.
- A bank guarantee: a bank’s undertaking to pay the landlord, on demand, up to a stated amount.
- A personal guarantee: where the tenant is a company, its directors (or another person) promise to pay and perform if the tenant does not, usually with an indemnity.
The amount is a matter for negotiation and is often expressed as a number of months’ rent plus GST. A retail landlord may require a bond, security deposit or guarantee from the tenant or any other person, including a guarantee from the directors of a company tenant. The Retail Leases Act 2003 (Vic) bans key money, but that ban does not prevent this (s 23(3)(e)).
Retail leases: rules for cash deposits
Under a retail lease, the lease is taken to provide that (s 24):
- a cash security deposit is held by the landlord on the tenant’s behalf in an interest-bearing account;
- the landlord accounts to the tenant for the interest, but may keep it as part of the deposit;
- the landlord cannot unreasonably refuse a guarantee from a bank or other authorised deposit-taking institution in place of a deposit, bond or third-party guarantee; and
- if the tenant has performed all its obligations, the deposit is returned within 30 days after the lease ends. This applies to leases running on 1 October 2020 as well as later ones.
The section does not affect any lawful right the landlord has to apply the deposit, for example to unpaid rent where the lease allows it. The 30-day rule is expressed to apply to a security deposit; when a bank guarantee is returned depends on the lease, so the lease should say. For the rest of the Act, see our Retail Leases Act guide.
Bank guarantees
A bank guarantee in a lease is usually unconditional. The bank pays on the landlord’s written demand and does not decide whether the tenant is really in default. The High Court has held that a bank’s obligation under this kind of guarantee is generally independent of a dispute under the underlying contract.
Calling on a bank guarantee
The tenant’s protection lies in the lease. Whether the landlord may call on the guarantee, for what amounts and after what notice, depends on the lease’s terms. The Court of Appeal has held that a beneficiary can be restrained from calling on security where the call is not permitted by the underlying contract, and a call can also be restrained in cases of fraud. A tenant who wants to stop a call must act quickly, because the bank will pay promptly. Under a retail lease, an application to VCAT for an injunction does not need a Small Business Commission certificate.
Landlords should check the default, any notice the lease requires and the amount before calling, and should keep a record of how the money is applied.
Personal and director guarantees
A guarantor’s liability is what the guarantee says. Many lease guarantees are unlimited in amount and extend to holding over, renewals under an option and variations of the lease. Under the general law, a variation made without the guarantor’s consent can discharge a guarantor if it may prejudice them, which is why many leases say the guarantor remains liable despite variations, extensions and time given to the tenant.
Guarantors should read the guarantee before signing, and ask for a cap, a time limit, and release on assignment. Under a retail lease, the tenant can offer a bank guarantee instead of a third-party guarantee, and the landlord cannot unreasonably refuse it (s 24(1)(c)). A dispute between a retail landlord and a guarantor is a retail tenancy dispute, so it can be referred to the Victorian Small Business Commission for mediation (ss 81(1A) and 86).
When the lease is assigned
On the assignment of a retail lease with an ongoing business, if the outgoing tenant gave the landlord and the incoming tenant an assignment disclosure statement in the prescribed form, and it was not false, misleading or materially incomplete, the outgoing tenant and its guarantors are released from liability for the incoming tenant’s defaults after the assignment (s 62). See assigning the lease.
Otherwise, including under office, warehouse and factory leases outside the Act, the outgoing tenant and its guarantors may remain liable after the assignment unless the landlord releases them. Landlords usually take fresh security and guarantees from the incoming tenant, and return the outgoing tenant’s bank guarantee once the replacement is in place.
If the landlord sells the building, a bank guarantee in the seller’s name may need to be transferred or replaced in favour of the buyer, and any cash deposit passed on. The lease should require the tenant to cooperate.
At the end of the lease
A landlord may apply security to the amounts the lease allows, such as unpaid rent, outgoings or the cost of make good the tenant has not done. See make good. A retail landlord must return the deposit within 30 days after the lease ends if the tenant has performed all its obligations. Tenants should ask in writing for the deposit or bank guarantee, and for an account of any deductions. Disputes over security go through the usual process: see lease disputes.
Drafting points
- The amount, the form, and whether it increases with the rent.
- What it secures: the term, holding over, any renewed term, and amounts payable after the lease ends.
- When the landlord may apply or call on it, and any notice required first.
- The tenant’s obligation to top it up after a call.
- For a bank guarantee: no expiry date, or one well after the lease ends, and a duty to replace it before it expires.
- Transfer or replacement if the building is sold.
- When it is returned, and the conditions for return.
- For guarantors: any cap, how long liability lasts, and release on assignment or surrender.
We deal with these when preparing a lease.
How we help
- Landlords: security and guarantee clauses that are enforceable and comply with the Act.
- Calling on a bank guarantee or deposit, or making a claim against a guarantor.
- Tenants and guarantors: reviewing the guarantee before you sign, and negotiating limits and releases.
- Recovering a deposit or bank guarantee at the end of the lease. Start with a free 15-minute phone call.
Common questions
Can’t see your question? Call 1800 776 529 or send us a message.
Under a retail lease, within 30 days after the lease ends, if the tenant has performed all its obligations. Under other leases, the lease decides, so check the clause.
No. The Retail Leases Act does not require a security deposit to be lodged with any authority. The landlord must hold a cash deposit on your behalf in an interest-bearing account and account to you for the interest.
The bank will usually pay on the landlord’s demand. Whether the landlord is entitled to call, and whether it must give notice first, depends on the lease. If you think a call is not allowed, get advice immediately.
Under a retail lease with an ongoing business, you and the tenant are released from the buyer’s obligations if the prescribed assignment disclosure statement was given and was accurate. Otherwise you may remain liable unless the landlord releases you, so negotiate a release as part of the sale.
Law referred to
- Retail Leases Act 2003 (Vic) ss 23(3)(e), 24, 61(5A), 62, 81(1A), 86, 87 and 123.
- Retail Leases Regulations 2023 (Vic) reg 12(2), Schedule 4.
- Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443.
- Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812.
- Holme v Brunskill (1878) 3 QBD 495.
Last reviewed: October 2026, by a Victorian solicitor with a current practising certificate. This page is general information about Victorian law as at October 2026. It is not legal advice about your lease.
Tell us about your lease
Send the form, or call. We reply within one business day, by phone, email or text, whichever you prefer.
What happens next
- Send the form.
- We reply within one business day.
- We arrange a time to talk, or ask for the lease and any other documents we need first.
Phone: 1800 776 529 (1800 PRO LAW)
Email: info@leaselawyers.com.au
Hours: Monday to Friday, 9 am to 5:30 pm
Office: 435 Nepean Highway, Frankston VIC 3199. We act across Victoria by phone, video and email.