Rent guarantee
A rent guarantee is the security that the tenant must provide for the landlord's claims under the lease, mainly ongoing rent and termination costs if the contract is breached. The standard forms in Norwegian commercial leasing are a bank guarantee, a parent company guarantee or a cash deposit in a blocked account. The guarantee protects the landlord against contractual losses when the tenant pays poorly or goes bankrupt, and it is one of the most heavily negotiated clauses in a commercial lease.
The bank guarantee is the most common form in larger commercial contracts. The tenant's bank issues a guarantee for an agreed amount, typically 3 to 6 months of rent including shared costs, which the landlord can draw on if the tenant defaults. The guarantee is normally "on demand" (paid out on the landlord's claim without a court ruling) to give the landlord quick liquidity, but it can also be conditional (requiring an enforceable judgment). Norwegian banks typically charge 0.5% to 1.5% annual commission to issue such a guarantee, and the tenant bears the cost. The guarantee is usually renewed each year or tied to the term of the lease.
A parent company guarantee is used when the tenant is a subsidiary or an SPV. The parent company itself acts as guarantor for the subsidiary's obligations. This is often cheaper for the tenant (no bank commission) but gives the landlord a weaker position, because the landlord depends on the parent company's finances and must go through the courts in a dispute. A parent company guarantee is typically used when the parent is large, creditworthy and listed. With smaller parent companies, landlords often insist on a bank guarantee as well.
A deposit is more common in residential and small business contracts. The tenant places an amount in a blocked account (normally 3 months of rent for housing under the Tenancy Act (husleieloven) § 3-5). Bank interest on the deposit normally accrues to the tenant. A deposit ties up the tenant's liquidity and is therefore less common in larger commercial contracts, where a bank guarantee is the more capital efficient solution.
The size of the guarantee is negotiated. The usual level is 3 to 6 months for normal tenancies, up to 12 months for new or uncertain tenants, and a minimum for large listed tenants with solid creditworthiness. Buildings with little competition for tenants (peripheral locations, a short remaining lease term) often face lower guarantee requirements as a negotiating position. Due diligence when buying commercial property regularly includes a review of existing rent guarantees. A building with weak guarantees against creditworthy tenants is worth less than one with solid bank guarantees against the same contract rent.
In Placepoint you can compare tenants and contract length from the property panel when you assess contract risk in a purchase and whether the security provided is proportionate.
How this looks in Placepoint
In Placepoint you find this in Property panel: Units and Tenants:
From the Placepoint glossary: Rent guarantee
More information: Lovdata: the Tenancy Act § 3-5, Finanstilsynet, Store norske leksikon: garanti (jus)
English: Rent guarantee, lease guarantee, security deposit.
Frequently asked questions
How large a guarantee can the landlord require?
For commercial leases this is freely agreed, typically 3 to 6 months of rent. For housing, the Tenancy Act § 3-5 sets a limit of 6 months of rent. The negotiation depends on the tenant's creditworthiness, the size of the contract and local competition for tenants.
What is the difference between a bank guarantee and a parent company guarantee?
A bank guarantee is issued by the tenant's bank against an annual commission (0.5% to 1.5%) and gives the landlord strong, on demand security. A parent company guarantee is issued by the tenant's parent company without commission, but the landlord depends on the parent company's finances, which is a weaker position in a default.
When is a deposit preferred over a bank guarantee?
A deposit is typically used for residential and small business contracts where a bank guarantee is impractical or expensive. For commercial property a bank guarantee is preferred because it does not tie up the tenant's liquidity and can be updated with the term of the lease without moving cash back and forth.
What happens to the rent guarantee in a company sale?
The guarantee normally follows the SPV and transfers automatically to the buyer together with the contracts. Bank guarantees may require formal readdressing (the bank must be notified), and parent company guarantees require a new guarantee if the buyer wants a new parent company as guarantor.