Bank guarantee and on-demand guarantee in commercial leases: protecting the institutional landlord

A property investment company (foncière) that signs a commercial lease (bail commercial) with a young restaurant brand, an SME with no solid financial track record or a recently formed subsidiary is exposed to a simple risk: the tenant stops paying rent after a few months, and by the time the premises are recovered through the courts, the unpaid balance has reached several quarters of rent and service charges. The security deposit (dépôt de garantie), often limited to two or three months' rent, then covers only a fraction of the arrears. The central question for the institutional landlord is therefore not whether up-front security is needed, but which to require and how to draft it so that it is triggered quickly and without challenge. This guide compares the three forms of up-front security, namely the security deposit, suretyship (cautionnement), in particular the bank guarantee and the personal guarantee of the manager, and the independent on-demand guarantee (garantie autonome à première demande), and then sets out how to call on these guarantees where rent goes unpaid.

Why the security deposit is almost never enough

The security deposit is the most common form of security, but also the weakest for a landlord letting to a fragile tenant. It consists of a sum paid on signature, which the landlord holds throughout the term of the lease and returns when the tenant leaves, after deduction of any sums due.

In commercial leases, the French Commercial Code sets no ceiling on the amount of the deposit. Article L. 145-40 provides only that sums paid by way of guarantee bear interest for the benefit of the tenant once they exceed two rent terms.

Sums paid by way of guarantee... bear interest for the benefit of the tenant at a rate equal to the rate applied by the Banque de France for advances against securities, where they exceed two rent terms. (Article L. 145-40 of the French Commercial Code)

In practice, market custom limits the deposit to two terms where rent is payable in arrears, and to three months where it is payable in advance, precisely to avoid the burden of interest. This limit explains the structural weakness of the deposit: two to three months' rent does not cover the real duration of an eviction procedure, which runs to months or even years between the payment order (commandement de payer), the summons, the decision and the actual recovery of the premises. Throughout that time, rent keeps running, service charges accumulate and the deposit proves largely insufficient.

The deposit has a second drawback, this time for the tenant: it ties up cash. A tenant who pays several months' rent as pure security reduces its working capital at the very moment it is investing in fitting out the premises. This is why professional property companies often combine a conventional security deposit with stronger personal security: suretyship or an independent guarantee.

Suretyship: an accessory guarantee to be handled with precision

Suretyship is the contract by which a person, the surety (caution), undertakes towards the landlord to pay the tenant's debt if the tenant defaults. It is governed by Articles 2288 et seq. of the French Civil Code, substantially reworked by Ordinance No. 2021-1192 of 15 September 2021 reforming the law of security interests, which came into force on 1 January 2022.

Its fundamental legal characteristic is that it is accessory. The surety owes only what the tenant owes, no more and no less. Article 2298 of the French Civil Code allows the surety to raise against the landlord all the defences, personal or inherent in the debt, available to the principal debtor. In concrete terms, if the tenant disputes the amount of rent claimed, alleges a breach by the landlord or has a clause of the lease annulled, the surety may rely on those same grounds to refuse to pay. This accessory character protects the surety, but slows down recovery for the landlord.

Personal guarantee of the manager: the reflex in SME leases

The most frequent personal guarantee in a commercial lease is that of the manager or main shareholder of the tenant company. The logic is simple: the landlord wants the person who controls the business to commit his or her own assets, so that he or she has a direct interest in the rent being paid.

This guarantee requires precise formalities to be observed, on pain of nullity or reduction of the commitment. A surety who is an individual must write a statement setting out, in his or her own words, the nature and extent of the commitment, in accordance with Article 2297 of the French Civil Code as it results from the reform. The earlier wording required a handwritten statement fixed word for word; the current text is satisfied with a statement in which the surety acknowledges the amount guaranteed and the commitment, but the slightest imprecision is still penalised by the courts.

Two further safeguards apply to an individual surety who is a manager:

• the principle of proportionality laid down in Article 2300 of the French Civil Code, which prevents the landlord from relying on a suretyship that was manifestly disproportionate to the surety's income and assets when it was entered into, unless the surety's assets allow him or her to meet the obligation when it is called
• the duty to warn under Article 2299, where the commitment is unsuited to the surety's financial capacity

For the landlord, the manager's guarantee has a strong psychological advantage but an uncertain economic value: it is worth what the surety's personal assets are worth, which may change for the worse, may be arranged to be protected from seizure, or may disappear with a change of manager. Hence the value of requiring a guarantee from a solvent and lasting third party: the bank.

The bank guarantee: the strength of a credit institution

A bank guarantee (caution bancaire) in a commercial lease consists of having the tenant's obligations guaranteed by a credit institution. The bank undertakes towards the landlord to pay, in place of the defaulting tenant, up to a fixed amount and for a fixed period.

The appeal for the landlord is obvious: a bank's signature offers a financial standing out of all proportion to that of an SME manager. The risk of the surety's insolvency virtually disappears. In return, the bank never issues this guarantee free of charge: it charges the tenant a commission and, above all, requires a counter-guarantee, most often a pledge of cash or of a term deposit account. In other words, the tenant ties up with its bank a sum equal to the amount guaranteed. The cash burden is therefore comparable to that of an enlarged security deposit, which explains why tenants negotiate hard over the extent of this requirement.

A drafting point deserves the landlord's attention: a bank guarantee remains a suretyship, and therefore an accessory guarantee, unless clearly stated otherwise. If the landlord wishes to benefit from automatic payment, without the bank being able to contest the lease or the existence of the debt, it should not draft a bank suretyship but an independent guarantee. The difference in terminology has major legal consequences.

The independent on-demand guarantee: the property companies' preferred security

The on-demand guarantee, or independent guarantee, is the most protective instrument for the institutional landlord. Introduced into the French Civil Code by the 2006 reform and now governed by Article 2321, it is defined as the undertaking by which the guarantor agrees to pay a sum, either on first demand or on agreed terms, in consideration of an obligation entered into by a third party.

An independent guarantee is the undertaking by which the guarantor agrees, in consideration of an obligation entered into by a third party, to pay a sum either on first demand or on agreed terms. (Article 2321, paragraph 1, of the French Civil Code)

Its strength lies in its independence: unlike suretyship, the guarantor cannot raise defences drawn from the lease. Article 2321, paragraph 3, provides that the guarantor is not bound by the defences or means of defence belonging to the principal debtor. In concrete terms, when the landlord calls on the guarantee in the manner provided, the guarantor pays, and cannot make payment conditional on proof that the arrears are real or on the outcome of a dispute between landlord and tenant. A tenant who disputes the debt must first pay, then bring an action for recovery of sums paid (action en répétition) if it considers itself wronged. This is the reversal of the burden of litigation, which is very favourable to the landlord.

Two limits temper this rigour. First, Article 2321, paragraph 2, deprives the landlord of the benefit of the guarantee in the case of manifest abuse or fraud by the beneficiary, or collusion between the beneficiary and the party at whose request the guarantee was given. Second, an independent guarantee is not presumed: it requires unambiguous drafting. The courts readily recharacterise as suretyship an alleged independent guarantee whose terms refer to the obligations in the lease or reproduce its detail, because such a reference betrays the accessory character of the undertaking. The criteria that distinguish the two forms of security and the drafting of a guarantee that stands up are set out in our article on the independent guarantee compared with suretyship.

Drafting an independent guarantee that withstands recharacterisation

For the independent guarantee to keep its nature, the landlord must make sure that the instrument:

• sets a fixed maximum amount, expressed in figures, independent of the calculation of rent due
• provides for payment on first demand, or on first justified demand, on a simple written statement by the landlord asserting the tenant's default
• does not make payment conditional on proof that the claim is real or on prior performance of the lease
• sets a clear period of validity, aligned with the term of the lease and the notice period for departure
• avoids reproducing any clauses of the lease in the body of the guarantee

The distinction is subtle but decisive: a guarantee providing for payment of “unpaid rent up to” a given sum comes close to suretyship, whereas a guarantee providing for payment of “any sum, up to” a given amount, “on the beneficiary's first written demand”, keeps its independence.

Comparing the three forms of security: what strategy for the institutional landlord?

The choice is not reduced to a preference in principle for the most rigid security. It depends on the tenant's profile, its negotiating power, the nature of the premises and the property company's risk policy.

The security deposit remains the basis, always required, but insufficient alone for an untested tenant. It should be seen as a first layer of cash available immediately, without any formality for calling on it.

Suretyship, and in particular the manager's personal guarantee, is called for where the tenant company is young or thinly capitalised and its controlling shareholder has personal assets. It makes the key individual accountable, but remains dependent on his or her solvency and on the protective formalities of Articles 2297 and 2300 of the French Civil Code. Calling on it may be slowed down by the defences the surety draws from the lease. On the assessment of disproportion and the burden of proof as between creditor and surety, see our analysis of manifestly disproportionate suretyship.

The bank guarantee raises the level of security by substituting a credit institution for the manager. It suits leases with high financial stakes, but its cost and the cash it ties up for the tenant make it a point of friction in negotiation.

The independent on-demand guarantee offers maximum protection and the fastest call. It is the tool of choice for institutional landlords facing tenants that are sound but whose power to block through litigation they wish to neutralise. It is, however, hard to impose on a small tenant, which will not necessarily obtain such an undertaking from its bank, and it requires flawless drafting to avoid recharacterisation.

As to the amount of a guarantee under a commercial lease, no legal rule imposes a ceiling. The amount is freely negotiated according to the risk: it is common to size the guarantee at six to twelve months' rent including service charges, a period that corresponds to the average time needed to recover the premises and relet them. A prudent landlord reasons in terms of rent including service charges and taxes, and covers not only the arrears but also the occupation indemnity due until the premises are actually vacated.

Calling on the guarantee where rent is unpaid: the procedure

The best security is worth only as much as the rigour with which it is called. The process differs radically according to the nature of the guarantee.

Calling on a suretyship

Faced with unpaid rent, the landlord first sends a formal notice to the defaulting tenant, then a formal notice to the surety. The landlord must first check the terms of the lease on when sums fall due (forfeiture clause (clause résolutoire), unpaid instalments) and comply with the obligation to inform an individual surety annually, failure to do so being capable of leading to forfeiture of the interest and penalties on the debt. Since the surety may raise the tenant's defences, the landlord must make sure its claim is certain, liquidated and due before acting. If the surety resists, recovery is by an action for payment before the court.

Calling on a bank guarantee

A bank guarantee is called in accordance with the precise terms laid down in the instrument: registered letter to the institution, within the period of validity, accompanied where appropriate by a statement of the sums due. The bank, remaining a surety, can in theory raise the tenant's defences, unless the instrument provides for a waiver or for payment on simple demand. Hence the importance of reading the bank guarantee instrument before arrears arise, and not at the time of calling on it.

Calling on an on-demand guarantee

This is the fastest scenario. The landlord sends the guarantor a demand for payment that complies, to the letter, with the terms of the instrument: written form, exact wording required, any statement of the tenant's default, compliance with the period of validity. The slightest discrepancy between the demand and the terms of the guarantee entitles the guarantor to refuse payment, not on the merits but on form. The guarantor then pays without discussing the debt, save in the case of manifest abuse or fraud. The absolute point of vigilance is the expiry date: a guarantee called one day after its expiry is lost. The landlord must build into its property management an alert for these dates, separate from that for the lease.

Anticipating the tenant's insolvency proceedings

The opening of safeguard proceedings, judicial reorganisation or judicial liquidation of the tenant upsets recovery. The landlord must file its claim for rent with the insolvency practitioner (mandataire) within the time limits, failing which it will be unenforceable against the proceedings. In safeguard proceedings, an individual surety benefits from protective rules allowing it to rely on certain provisions of the plan. By contrast, the independent on-demand guarantee, because of its independence, largely escapes these protections: the guarantor remains bound to pay notwithstanding the proceedings opened against the tenant, which confirms its superiority for the institutional landlord facing a risk of default. This factor weighs heavily in the initial choice of security. The fate of the commitment of a manager who has given a guarantee, during the proceedings and in liquidation, is covered separately in our article on the manager's personal guarantee and insolvency proceedings.

Conclusion: favour the independent guarantee, secure its drafting

For an institutional landlord, the hierarchy is clear. The security deposit is the foundation, but protects only for a few months. The manager's personal guarantee makes the key individual accountable without guaranteeing his or her solvency. The bank guarantee brings the strength of a credit institution at the price of tough negotiation. The independent on-demand guarantee remains the most effective instrument, because it reverses the burden of litigation and withstands the tenant's insolvency proceedings.

The approach for a property company with a favourable bargaining position is to require an independent guarantee, sized at six to twelve months' rent including service charges, together with a conventional security deposit. But this legal superiority holds only if the instrument is drafted without fault: one clumsy word, a reference to the lease, an amount indexed to the calculation of rent, and the court recharacterises the guarantee as suretyship, restoring to the tenant all the defences the landlord thought it had neutralised. Before signature, have the security clause and the guarantee instrument reviewed by a lawyer, checking point by point the independence of the undertaking, the amount, the period of validity and the exact terms for calling it.

Frequently asked questions

What is the maximum amount of a guarantee under a commercial lease?

No legal ceiling applies to the amount of a guarantee under a commercial lease. The amount is freely negotiated according to the risk. For the security deposit alone, Article L. 145-40 of the French Commercial Code provides that sums exceeding two rent terms bear interest for the benefit of the tenant, which in practice limits the deposit. For a bank guarantee or an independent guarantee, it is common to settle on six to twelve months' rent including service charges.

What is the difference between a bank guarantee and an on-demand guarantee?

A bank guarantee is a suretyship, and therefore an accessory guarantee governed by Articles 2288 et seq. of the French Civil Code: the bank may in principle raise against the landlord the defences drawn from the lease. An on-demand guarantee, governed by Article 2321 of the French Civil Code, is independent: the guarantor pays without being able to invoke the tenant's means of defence. An independent guarantee is therefore faster and safer for the landlord, subject to rigorous drafting.

Is a manager's personal guarantee valid without a handwritten statement?

Since Ordinance No. 2021-1192 of 15 September 2021, which came into force on 1 January 2022, a surety who is an individual must write a statement setting out, in his or her own words, the nature and extent of the commitment, in accordance with Article 2297 of the French Civil Code. The handwritten statement fixed word for word is no longer required, but an imprecise or missing statement is still penalised. Formality therefore remains essential to the validity of the guarantee.

Can the landlord combine a security deposit and a guarantee?

Yes. The security deposit and suretyship, or the independent guarantee, are legally distinct and can be combined without difficulty. Property companies almost systematically combine a security deposit equal to two to three months' rent with stronger personal security. Combining them strengthens protection by offering both immediately available cash and a guarantee covering the real duration of the dispute.

Does an independent guarantee survive the tenant's judicial reorganisation?

Yes, and this is one of its main strengths. Because of its independence, the independent on-demand guarantee under Article 2321 of the French Civil Code obliges the guarantor to pay notwithstanding the insolvency proceedings opened against the tenant. The protections enjoyed by an individual surety in safeguard proceedings do not apply to an independent guarantor. The landlord must nevertheless always file its claim for rent with the insolvency practitioner within the time limits.

What should be done if the tenant disputes the debt after a call on an independent guarantee?

With an independent guarantee, the guarantor pays first, on a compliant first demand, without examining the merits. A tenant who disputes the debt must then bring an action for recovery of sums paid in order to recover the sums it considers to have been wrongly paid. The guarantor may refuse to pay only in the case of manifest abuse or fraud by the landlord, or collusion, in accordance with Article 2321, paragraph 2, of the French Civil Code. This reversal of the burden of litigation is very favourable to the landlord.

How long does it take to recover commercial premises where rent is unpaid?

The duration depends on the operation of the forfeiture clause and on court congestion, but it generally runs to several months between the payment order invoking the forfeiture clause, the summons, the decision and the actual vacation of the premises. Throughout that period, rent and the occupation indemnity continue to accrue. It is precisely this duration that justifies sizing the up-front security at six to twelve months' rent rather than on the security deposit alone.