New rent insurance product launched

A new rental deposit guarantee insurance product designed to allow commercial tenants to retain valuable working capital while providing landlords with the security they require has just been launched on the Irish market through Robertson Low insurance brokers.

Commercial and retail landlords frequently look for substantial financial security from their tenants, usually a sum equivalent to six or 12 months rent. At present, prime office space of, say, 5,000 sq ft in Dublin city centre can command rents up to £40 (€50.80) per sq ft, amounting to around £200,000 (€254,000) per year. Tenants usually provide landlords with cash deposits or, more frequently, a bank guarantee. Tenants often see it as "dead money". A cash deposit ties up a significant amount of cash for the first five years of the lease while a bank guarantee is usually issued against a cash deposit with the bank, often leading to a reduction in borrowing facilities.

The rental deposit guarantee product is arranged with an underwriter who holds a security rating of A+ with Standard and Poor, so the security being provided to landlords is substantial. Tenants looking to avail of this service pay an initial fee based on the specific risk profile of each tenant and determined on a case-by-case basis.

Once he receives the initial premium, the underwriter issues the landlord with the guarantee, undertaking to honour the tenant's financial obligations under the lease up to the specified maximum sum. This sum is usually equivalent to six months' rent within a 12-month period. However, the guarantee period can be extended up to a maximum of 18 months.

The disadvantages for businesses of having working capital tied up as a guarantee are obvious. With this cash sitting in the landlord's account, companies starting up are deprived of much-needed funds to develop the business. Companies looking to rent office space in any of the new business parks are faced with the prospect of lodging a rental deposit of between £50,000 (€63,500) to £100,000 (€127,000), something that can frequently hamper their growth.

The new insurance product has been on the British market for over a year and Andrew Low of Robertson Low explains the benefits for younger companies. "This product has great benefits for companies that have been in business for around three years, which have good cash flows but little in the way of capital reserves," he says. Once a company proves this financial security to the underwriter, it can then close the deal on the contract.

Another advantage, according to Low, is that tenants can secure premises that may have been unaffordable due to the deposit required.

Financial obligations covered by the rental deposit guarantee are the initial rent deposit, service charges and all other lease obligations. At the end of each calendar month, the guarantee period reduces by one month; in order to maintain the 12 months security, the tenant is required to pay a monthly extension fee. Upon payment of this fee, the guarantee continues to roll for the period stipulated by the landlord.

UNDER the guarantee, the underwriter will pay the landlord any amounts due by the tenant under the lease, limited to the guaranteed sum, where the tenant remains in default for a period of seven days after the landlord has issued a letter of demand.

Taking an example whereby a tenant enters into a lease agreement with quarterly rental of £25,000 (€31,750), payable in advance, and a deposit of £50,000 (€63,500), the initial payment to the landlord would be £75,000 (€95,250). With the rental deposit guarantee the tenant would pay the landlord £25,000 (€31,750) and the underwriter guarantees the required financial obligations.

In this example, the tenant pays a 10 per cent initial fee of £5,000 (€6,350) and a monthly extension fee of £466.66 (€592.66) so that the guarantee remains constant at £50,000 (€63,500) for a 12-month period. The landlord gets the financial security while the tenant releases valuable working capital for more productive use and a tax write-off of the initial fee and the extension fee.

The rental deposit guarantee can be used by tenants who are signing new leases, entering into assignments of leases, or have already paid cash rent deposits or have furnished bank guarantees within the past four years. It can be used to substitute the deposits and guarantees, unlocking valuable capital.