Securing Your Security: Landlord’s Should Register Their Interest in Cash Security Deposits
By Caroline Inglis
7 June 2016
The PPSA is the Personal Property Securities Act which governs the registration of security interests on the PPS Register. Although interests in land are specifically excluded from the PPSA, there are still implications for landlords including where landlords hold cash security deposits.
A prudent landlord will require a tenant to provide security under the lease. There are two main forms of security being bank guarantees and cash security deposit. Cash security deposits used to secure performance of the tenant’s obligations under the lease create a “security interest” in favour of the landlord under the PPSA. Landlords should register their security interest on the PPS Register to protect their interest in the event of tenant insolvency. If a landlord who holds a security deposit has not registered its interest in that security deposit on the PPS Register and the tenant becomes insolvent, the security deposit is likely to vest in the tenant. This will result in the landlord becoming an unsecured creditor and the landlord losing the benefit of the security deposit.
What about bank guarantees?
Bank guarantees are not affected by the PPSA because a bank guarantee is a contractual promise to pay money which creates contractual rights against the bank guarantor and does not give the landlord an interest in the tenant’s property.
What Do We Recommend Landlords Do?
Landlord clients should seek to obtain a bank guarantee rather than a cash security deposit
If a cash security deposit is accepted instead, we recommend that the landlord, as a condition of acceptance of the security deposit over a bank guarantee, registers a security interest over the security deposit on the PPS Register. The landlord should seek to recover its costs of registration and removal from the tenant as part of the agreement to accept a cash security deposit instead of a bank guarantee.
It is important to obtain legal advice from a specialist in the area before taking any action in respect to a lease. Tisher Liner FC Law are accredited Property Law Specialists and can assist Landlords and Tenants in all property law matters.