- Landlords should register security interests on the PPSR in cash security deposits or cash bonds paid under a commercial or retail leases
- If it is not registered, and the tenant appoints an administrator or liquidator, the landlord’s security interest in deposit or bond vests in the tenant
- The COVID-19 pandemic brings a heightened risk of insolvency for tenants
- Recent legislative changes give landlords a longer window of opportunity for the registration of security interests in security deposits that have not yet been made
Security deposits and the PPSR
Commercial and retail property leases often require the tenant to provide a security deposit or bond as security for the performance of the tenant’s obligations to the landlord under the lease.
The landlord has a registrable security interest under the Personal Property Securities Act 2009 (Cth) (PPSA). The security interest needs to be registered on the Personal Property Securities Register (PPSR) to ensure its enforceability in the event of the tenant appointing an administrator or liquidator.
This is especially necessary where the security deposit or bond is held in an estate agent’s trust account or in a separate account controlled by the landlord. This is because the tenant remains the beneficial owner of the funds, subject to the landlord’s security interest. If the security interest is not registered, it ‘vests’ in the tenant upon a liquidator or administrator being appointed. The landlord thereby losses its ability to call upon the security deposit or bond which becomes payable to the liquidator or administrator.
Timing for registrations
Security interests generally need to be registered within 20 business days of the earlier of the execution of the lease and the tenant providing the cash security deposit.
Where a security interest is registered outside that time frame, and an administrator or liquidator is appointed to the tenant within six months of the actual date of registration, the security interest will vest in (become the property of) the tenant. In these circumstances, the landlord will have no recourse to the security deposit to remedy rental arrears or other lease defaults. However, after six months, a security interest that is registered late will no longer vest and will be enforceable by the landlord, but it may lose priority to an earlier registered security interest in the same property.
Impact of the COVID-19 pandemic
The COVID-19 pandemic is a challenging time for many businesses and there is a heightened risk of insolvency for tenants and defaults under leases. Landlords should take all steps within their power to protect their interests in respect of potential insolvency of a tenant, including by registering security interests in any security deposits held by the landlord or an agent.
In response to the current environment, the federal parliament recently passed the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Coronavirus Response Act), which includes a range of measures which include extending the time for responding to a creditor’s statutory demand (a common trigger for the insolvency of an entity) from 21 days to 6 months.
Further details about the Coronavirus Response Act can be found here.
The effect of the Coronavirus Response Act for landlords is that it may be less likely that a tenant will enter into administration of liquidation within the next six months, meaning the security interests registered in security deposits now may, if even if registered ‘out of time’, have a better chance of passing the six month vesting date and becoming enforceable by landlords.
Notwithstanding the introduction of the PPSR some years ago, we are finding that many landlords and agents still neglect to register security interests in security deposits.
The passing of the Coronavirus Response Act represents an excellent opportunity for landlords to obtain better protection against tenant insolvency.
We recommend that our landlord clients now conduct a review of the security deposits they hold to determine whether security interests should be registered on the PPSR.
It is important that registrations are made properly. We recommend that our landlord clients speak to us to obtain advice about the strict PPSR registration requirements. We can assist for a fixed fee by either making the registrations for landlords, or by providing registration training so that landlords can complete registrations “in house”.
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