Types of tenant and renter surety bonds Law office

The law allows real estate owners in Israel to require various surety bonds from tenants. It is important that both parties to the transaction know about the various types of tenant and renter surety bonds that exist in rental contracts, the differences between them, and the circumstances under which the bonds may be limited. This important issue is explained in detail below.

For questions regarding surety bonds and home rental matters, you are welcome to contact our law firm, which has branches in Jerusalem and Tel Aviv and specializes in rental law, real estate law, contract law, and land law. The firm provides legal solutions for private and business tenants. We assist, inter alia, with issues pertaining to rental of private apartments, offices and businesses, commercial contracts, and sales agreements.

Why Are Surety Bonds So Common?

Rental contracts, in which property owners allow another party to temporarily use an apartment, home, or office that they own, involve uncertainty and require creating mutual trust. Although compensation mechanisms may be agreed upon in the contract, this is the reason that rental contracts today almost always contain an agreement about surety bonds, which serve as a protection mechanism for the homeowner. The parties to the transaction agree in advance that a surety bond will be deposited with the landlord, and, if the contract is breached, or if certain events occur that are stated in advance in the contract, the bond will be paid. Below is a list of the main types of surety bonds, including cases in which the bond is limited by law.

Types of Tenant and Renter surety bonds

The surety bonds used in rental contracts in Israel can be divided into two groups. The first group concerns obligations that only involve the renters and do not require any third party to issue the bond. This group includes:

Security cheques – These are regular bank cheques, serving as a security cheque and which may be used to withdraw a fixed amount of money that was agreed upon in advance in the rental contract. Alternatively, a blank cheque may be used, to withdraw money owed to the authorities (such as arnona – Israeli property tax, electricity bills, or water bills).
Deposits – A deposit is a fixed amount of money paid in advance to the landlord, who keeps the money and, in the event that the renter fails to make payments, or in any other event agreed upon in the rental contract, the landlord will take the amount from the deposit.
Promissory notes – A promissory note is a legal document in which the renter agrees to pay a certain amount of money in certain conditions specified in advance in the contract. The main flaw in this type of guarantee is that it comes in addition the contract terms and is not very different from them.

The second group concerns liabilities that require the involvement of additional parties. This group includes:

Autonomous bank sureties – This type of surety bond must be signed by the renter (the principal), the home owner (the obligee), and the bank (the surety), who agrees to pay the home owner a fixed amount of money decided by the home owner in advance.
Guarantors – These are usually two individuals who closely know the renter. In the event that the renter avoids paying the rent, the home owner will be able to contact the guarantors as a third party and collect the payment from them.
Bail bonds – Like a promissory note, a bail bond is a legal document in which a commitment is made, but guarantors are also required to sign it.

Cases in Which Bonds Are Limited by Law

Rental contracts may include one or more of the bonds discussed above. The Rental Law was amended several years ago regarding the rental of residential apartments. The amendment has been dubbed the “Fair Rent Law” and includes, among other things, rules restricting the amount of bond that may be required of a tenant when it involves financial outlay. In rents that meet the conditions of the law, the amendment stipulates that the amount of bond must be either one-third of the rental period or three months’ rent, whichever is lower.

This restriction applies to apartments that meet certain conditions. It does not apply in cases where the rental period is less than three months or more than ten years. It also does not apply to apartments in hotels, student dormitories, sheltered housing, and in cases where the rent is higher than ILS 20,000 a month. In addition to this restriction concerning the amount of bond, there are also restrictions on how the bond may be paid, which are expanded upon in another article published on our website.

Contact Our Contract Law and Land Law Experts

This article has presented an overview of the various types of surety bonds that exist in rental transactions. There are, of course, other aspects of each of these types of bonds, that have not been discussed here. It is important for homeowners and renters to know that their choice of bond, as well as how the rental contract is worded, may have legal consequences. It is therefore important to seek legal advice from a lawyer who is experienced in the field. Our law firm has experts in real estate and contract law, who will provide you with comprehensive professional legal advice and assistance regarding your rental contract.