Hue v Dura has highlighted the importance of Landlords registering their interest in a Tenant's security deposit on the Personal Property Security Register (PPSR).
In the event a Tenant is placed into administration or wound up, a Landlord who has failed to register their interest in the security deposit on the PPSR may find themselves in a situation where the security deposit is paid to the Tenant's secured creditors before the Landlord, even though the secured creditors are not a party to the lease.
What does this mean for landlords?
In a lease, security deposits are funds provided by a Tenant (in one transaction or multiple transactions) and held by the Landlord or Landlord's agent, as security for performance of a number of Tenant obligations pursuant to the lease e.g. in the event the Tenant fails to pay rent or fails to comply with their "make good" obligations upon vacating the property, then the security deposit covers part of the loss a Landlord may suffer.
The Victorian Court of Appeal found that a security deposit paid by a Tenant pursuant to a lease ordinarily contain the core characteristics of a security interest that is capable of registration on the PPSR.
In brief, these core characteristics are:
- the payment (or transaction) of the security deposit by the Tenant to the Landlord (or third party) secures performance of an obligation under the Lease; and
- the payment (or transaction) has been fully consented to by the Landlord and the Tenant.
Since a security deposit paid by a Tenant pursuant to a Lease can be characterised as a security interest capable of registration on the PPSR, a Landlord must register their interest in the security deposit on the PPSR to ensure the Landlord is classified as a secured creditor. The Landlord cannot solely rely on the terms of the lease as their security.
Failure to properly register their interest on the PPSR may result in a Landlord being classified as an unsecured creditor. In the event a Tenant enters administration or is wound up, a Landlord who has failed to properly register their interest would rank behind the Tenant's secured creditors, potentially leaving the Tenant's security deposit out of reach of the Landlord.
What should landlords do now?
To help ensure that a security deposit is secure, it is important that the Lease contains the right clauses to show that payment of the security deposit is consented to and that the Landlord's interest in the security deposit can be registered on the PPSR immediately after the Lease is executed. Failure to register the security interest within 20 business days after the Lease comes into force may result in the Landlord being classified as an unsecured creditor, potentially losing any future access to the security deposit as a result.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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For further information contact
Andre is a Principal of Sharrock Pitman Legal.
He heads our Property Law Group and is an Accredited Specialist in Property Law (accredited by the Law Institute of Victoria). He also deals with Commercial Law. For further information, contact Andre Ong on his direct line (03) 8561 3317.