How do you collect security from a tenant under a lease? Is it through a bank guarantee, cash bond, or a personal guarantee?
While landlords may consider a bank guarantee more secure than a cash bond to safeguard against a tenant’s potential insolvency event, cash bonds can be secured in a way that is often overlooked.
How can you secure a cash bond?
A cash bond is considered ‘personal property’, which under the Personal Property Securities Act 2009 (Act) is a form of currency. Depending on the terms of the lease, a landlord can register a security interest over a cash bond on the Personal Property Securities Register (PPSR).
The PPSR is a national register that notifies interested parties as to what security is in place over personal property and against entities/individuals. It’s also used to determine the priority of a secured creditor in the event of an insolvency event.
It’s important to point out that cash bonds do not become the property of the landlord on payment. The landlord only holds the cash bond as security under the lease and the cash bond remains the tenant’s property.
This means that, without registration, the cash bond will likely vest in the tenant on an insolvency event leaving the landlord waiting in line as an unsecured creditor. In this instance, the cash bond may be used to pay other higher-ranking creditors over the landlord.
A cash bond registered on the PPSR can create a priority for the landlord over other creditors who are unregistered or who have registered a later interest.
What steps should you take?
Landlords should make sure the lease provides a right for the landlord to register and enforce security interests on the PPSR, including the recovery of costs from the tenant for the registration fees and removal of the registration once the lease ends.
If your lease does not include a PPSA clause, then your lease needs an update!
Did you know that there are also strict timeframes for registering a security interest? Landlords need to act fast once the lease is executed and the bond is paid. That means registering its security interest over the tenant and the account in which the cash bond is being held.
Recommendations to Landlords
The risk of insolvency has become even more of a reality during COVID-19 with the economic strain it has put businesses under. It is crucial landlords take the necessary steps during negotiations and after the finalisation of the lease to protect its position.
As a Landlord you should:
- seek personal guarantees in addition to security;
- ensure the lease includes appropriate PPSA clauses so that the deposit can be registered on the PPSR;
- have an experienced solicitor attend to the registration on the PPSR as soon as possible to ensure it is registered correctly and its validity cannot be successfully challenged.
If you are in the process of negotiating your lease or would just like further information, please contact the team at Redchip.