Fancy giving your tenant’s creditors your security bond?

Does this sound crazy? The thing is, under the PPSA regime, this is exactly what most landlords will end up having to do.

By now, everyone has heard about the Personal Property Securities Register (PPSR), which came online on 30 January 2012, (well, we hope so!). However, the implications of the new registration system are still not widely known.

Unfortunately for many people, the need for registration is only discovered after it is too late.

One of the less intuitive extensions of the new system is to commercial leases. While real estate of any kind is excluded from the PPSR, commercial leases still invariably involve ‘personal property’ of some kind – most commonly the fittings or fit-out of the premises, the cash security bond, and any goods abandoned by the tenant after vacating.

So how can you, as a landlord, ensure your rights to personal property are protected?

Step 1: Ensure your commercial lease contains a PPSA clause – and update if it doesn’t

If your lease does not have a PPSA clause setting out your rights to protection of security interests under the Personal Property Securities Act (PPSA), then your lease is in need of an update.

We would expect to see a clause that expressly allows you (as landlord) to register and enforce security interests in personal property under the lease. The clause will also typically include a waiver of some of the rights that the tenant would otherwise have under the PPSA. The clause does not have to be lengthy or complicated, but you should obtain proper advice on its terms to ensure that it is effective.

Step 2: Take stock of your personal property that is at risk

As a landlord, it is a good idea to keep tabs on any property at risk under the lease,  yet so few landlords give a second thought to anything once they have signed on the dotted line.

The reality is that there are two important types of property that are at risk in a commercial lease scenario:

  • Your own property in the form of fittings and fit-out; and
  • The tenant’s security bond.

The fittings and fit-out are at risk because they pass into the tenant’s possession for the duration of the lease, which means they are potentially up for grabs by a registered creditor of the tenant.

Similarly, because the tenant’s security bond is usually in the form of cash, the bond is also personal property that can be claimed by a registered creditor of the tenant!

To protect yourself against any nasty surprises, you should register your interest in any valuable fittings or fit-out of the premises at the commencement of the lease.

You should also register your interest in any cash bond the tenant has provided as security when you receive it, even if you control the bank account it is kept in. In the case of cash bonds, security should be registered over both the tenant and the relevant bank account.

Step 3: Bullet-proof your director’s guarantee

If the tenant’s director has given a personal guarantee for the lease, whether it falls within the scope of the PPSA depends on the guarantee terms.

If your guarantee contains a charging provision where the director agrees to charge their personal property as security for the tenant’s performance, this will fall within the PPSA regime. Therefore fail to register the guarantee at your own peril.

Step 4: Secure your ownership of any abandoned goods

Most commercial leases already contain a clause that provides that any goods abandoned at the premises at the expiry or termination of a lease become the property of the landlord. This type of clause now gives rise to a registrable security interest in favour of the landlord.

The tricky part is that the interest needs to be registered at the commencement of the lease. Accordingly, a landlord will need to make an early determination about whether the tenant has any goods that, if ultimately abandoned, would have value to the landlord.

The PPSA also has an impact on how abandoned goods must be dealt with by the landlord. In particular, a landlord now has an obligation to search the PPSR to see if there is any valid security interest registered over the abandoned goods. In many cases, it is likely that the landlord’s claim to the goods will be trumped by a registered creditor.

The lesson

The lesson for every landlord is that they should audit their commercial leases to ensure that they stack up. Without proper measures in place, there is a very real risk of getting caught in a PPSA trap in the future.

Does your lease need updating? Give us a call. Need to register your interest in personal property? We can help. Call us on 1300 654 590 or email us.

The information contained in this post is current at the date of editing – 27 March 2023

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