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If you are looking to rent a property in Spain, it is very possible that your landlord has asked you for a bank guarantee. Like the security deposit or bond, both tools are mentioned in Spain's law on urban leases (LAU) and are intended to provide the landlord with a guarantee that the tenants will comply with their payments.
The deposit is compulsory, as stipulated in article 36.1 of the LAU, "in an amount equivalent to one month's rent in the case of rental of dwellings and two months' rent in the case of rental for use other than as a dwelling, such as commercial premises or offices." This deposit is returned at the end of the rental contract provided no term of the contract has been violated and the tenant's use of the dwelling has been appropriate.
So, what happens when the landlord also asks for a bank guarantee to formalise the rental agreement?
As explained by the Bank of Spain, a bank guarantee is a written document issued by a financial institution in which they become the guarantor for a previously agreed-upon amount of money should the tenant fail to comply with their obligation to pay the rent to the third party (the landlord).
Before granting a guarantee the bank assesses, in the first instance, the client's capacity to meet the required rental payments. It then takes into account any other personal, mortgage or other financial commitments that the client may have, as well as what other monies might be available to them so that, if necessary, the client could reimburse the bank for the money it previously advanced to the client as a guarantee.
The document specifies the maximum amount guaranteed, the period of validity of the guarantee and the conditions under which it can be claimed. In addition, the tenant is usually required to have a bank guarantee cover policy formally notarised.
The tenant keeps the original guarantee document so they can cancel it when the time comes if all payments have been covered without any problem. The landlord is given a copy to serve as an additional guarantee to the rental contract. Lastly, the tenant should ensure that the lease or rental agreement acknowledges the existence of this guarantee (for their protection).
If the tenant does not pay the rent or causes damage to the property, the landlord can claim the amount guaranteed in this document. In this case, the bank would proceed to pay the landlord the money stipulated as security and, in turn, reclaim said amount from the tenant.
Some banks, in order to avoid any risks and to have better guarantees, may ask the client to leave the agreed amount in an account and those funds would remain unavailable until the guarantee expires. This is known as a financial pledge.
For this reason, the Bank of Spain points out that it is important to evaluate the costs, conditions and financial implications of a bank guarantee for renting, "as the entity is providing a financial service with associated processing costs and commissions", and it therefore advises renters to explore alternatives such as taking out rental insurance, paying a deposit or providing a personal guarantee.
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