Home UpdatesHow Can a Landlord Best Protect Their Rights from an Insolvent Tenant

How Can a Landlord Best Protect Their Rights from an Insolvent Tenant


This paper was co-authored by Kellie Cook, Senior Associate

The Landlord’s ability to recover money from a Tenant in circumstances of insolvency is affected by the security they take, and also the introduction of the Personal Property Securities Act 2009 (PPSA).

What is the Personal Property Securities Act 2009?

The PPSA came into effect in January 2012, and reformed the securities law in Australia. Although dealings with land are specifically excluded from the PPSA, there are still implications for Landlord’s when leasing land/premises, and Landlord’s need to be aware of these in order to best protect their interests.

A security interest arises when a party has an interest in personal property. Personal property is defined in the Act very broadly, and in relation to leasing, relevant examples of personal property include:

  • plant & equipment within the premises (but not the premises itself or any fixtures);
  • fit out that is not affixed to the premises;
  • certain interests in money or proceeds.

In order to have a security interest under the PPSA that is enforceable against third parties, it needs to be ‘perfected’. There are four different ways in which a security interest can be perfected (attachment, registration, possession, control), and in the case of leasing this will usually be through registering the interest on the Personal Property Securities Register (PPSR). Landlord’s need to be aware of this, as without registration (perfection) the Landlord’s interest will be unsecured if the Tenant becomes insolvent.

One of the new concepts introduced by the PPSA is in section 267, and this provides that if a person with a security interest has not registered that interest (or otherwise perfected it), the property the subject of the interest is considered to vest in the Tenant immediately before the time of insolvency. This will mean that if a Landlord has not registered an interest it cannot seek to enforce that interest, the effect being that the property the subject of the security interest will instead be available to a liquidator/administrator/receiver to use for the satisfaction of debts owed to all creditors, and the Landlord will not have priority.

Security from a tenant for payment

When entering into negotiations for a lease, Landlords should always consider what security they want from any incoming Tenant. Since the introduction of the PPSA, Landlords should now consider the type of security they want in light of the implications of the PPSA.

Bank Guarantee

There are however practical problems that arise with a bank guarantee, which are:

  • The bank guarantee will include conditions for payment, and these conditions should be reviewed before the bank guarantee is simply accepted;
  • Bank guarantees can take time for a Tenant to obtain, and as such often Tenant’s seek approval to take possession without the bank guarantee in place – a Landlord should have the bank guarantee in place before allowing the Tenant to take possession;
  • A lot of bank guarantees have an expiry date – Landlord’s need to be mindful of these dates, and in advance of a bank guarantee expiring they need to seek an updated/replacement bank guarantee from the Tenant if necessary;
  • Banks often try to make the expiry date of a bank guarantee the same date as the expiry date of the lease – ideally there should be no expiry date, but if there is one then it should be 3-6 months after the expiry date of the lease (or expiry date of the latest option term), so that any make good works or end of lease obligations that have not been complied with can be claimed on the bank guarantee if necessary.

Cash Bond

This form of security is impacted by the introduction of the PPSA.

As the provision of a cash bond is security for the performance by the Tenant of its obligations under the lease, it does give rise to a PPSA security interest. This means that a Landlord should be registering its interest over both the Tenant and the account in which the cash bond is being held in order to secure its priority. It is not enough that the Landlord is in control of the account in which the cash bond is being held.

If a Landlord does not register its interest in a cash bond on the PPSR, then in the event of insolvency of the Tenant the cash bond is likely to vest in the Tenant, and the Landlord will join the queue of unsecured creditors.

Personal Guarantees

Often a Landlord will be provided with a personal guarantee from the directors of a Tenant company. Personal Guarantees do not give rise to a PPSA security interest, unless the guarantee includes a specific charging provision, whereby the guarantor charges their property with their performance of the guarantee terms.

One matter to be taken into account with personal guarantees is that if a Tenant is in administration, a guarantee from that company’s director cannot be enforced whilst the company remains in administration, due to the provisions of the Corporations Act 2001.

There are also practical considerations when taking and relying on a personal guarantee, you do not know how many guarantees a person has given or whether there will actually be any assets left to claim when you seek to enforce it.

Leasing personal property

If the leased premises also include any Landlord’s personal property – such as partitioning, plant and equipment or furniture (not fixtures), then the lease should include a PPSA clause allowing the Landlord to register an interest over this property as the owner. One of the most significant changes in the PPSA compared to previous securities legislation is that owners are now, in certain circumstances, required to register their interest in their own property if it is not in their possession, in order to protect their ownership as against an administrator/liquidator etc. in the event of an insolvency.

If a lease includes any Landlords personal property, and the Landlord does not make a registration to protect itself, then under section 267 of the PPSA that property will vest in the Tenant immediately before the event of insolvency.

There has now been case law in Australia, which confirms the decisions of Canadian and New Zealand Courts, that if there is no registration or an incorrect registration on the PPSR the property becomes the Tenants and can be dealt with by an administration or liquidator etc.

The Landlord should consider at the commencement of each new lease/extension/assignment what property it has in the Premises, and if in certain circumstances that property is valuable then it may choose to make a registration.

Abandoned goods at the end of the lease

All leases should make provision for what happens to any of the Tenant’s property left at the premises at the end of the lease. This type of clause then also applies in the case of a Tenant’s insolvency, or if the lease has simply expired.

How to proceed with abandoned goods is totally dependent on the wording of the lease.

However, Landlords should be aware that the PPSA has changed the process a Landlord has to go through when dealing with any remaining Tenant’s property.  If there are abandoned goods left in the premises, the Landlord should always search the PPSR first, to see whether any third party has a perfected security interest against the Tenant’s property in the premises.

If there is a clause within the lease, whereby title to abandoned property of the Tenant or proceeds from the sale of abandoned Tenant’s property becomes the Landlords, then a registrable PPSA security interest in favour of the Landlord may arise. Landlords may not always wish to make a registration, as the property of the Tenant may not have any re-sale value. This is a matter that Landlords should consider commercially when entering into each new a lease/assignment/extension, but it may only be in certain circumstances that a registration is actually made. If there is certain property a Landlord wants to register against then it will need to instruct its solicitor of this at the outset of the lease preparation.

If the lease does not provide for what happens to Tenant’s abandoned goods at the end of a lease, then the Disposal of Uncollected Goods Act 1970 will likely apply, and this provides for a time consuming process. It is best for abandoned goods to be dealt with in the lease document to simplify this process.

Registration

It is very important when making a registration on the PPSR that all information included is correct, because if it is not correct the Landlord will not be considered to have ‘perfected’ its security interest.

When making registrations there is certain information a Landlord/agent needs to make sure it has to enable them to register, and this information is different for each of a company, an individual, a trust as well as any description of property that the Landlord may be taking security over (including a cash bond).

If any item of Landlord or Tenant personal property is a serial numbered good (e.g. a motor vehicle/photocopier) then it needs to be registered using the serial number.

Critical points to remember

It is very important for Landlords to know of and be aware of the PPSA, and also the implications of insolvency. When negotiating a lease, assignment or extension a Landlord should always consider:

  • whether the security being provided is the best security for the Landlord and is properly dealt with e.g. the bank guarantee is on acceptable terms/a registration is made over a cash bond;
  • whether the lease lists an event of insolvency as an automatic breach/default of the lease;
  • if there is Landlords’ personal property within the premises, that there is a clause in the lease enabling the Landlord to register its interest if it wishes to do so;
  • whether the lease provides for what happens with abandoned goods on the expiration/termination of the lease.

It is also important to be aware that there was a transitional period built into the PPSA, which allowed people time to locate any security interest that was created before the commencement of the PPSA. This process allowed a party to retain the priority they had immediately before the introduction of the PPSA. The transitional period expired on 30 January 2014.

The expiration of the transitional period means that any security interest created prior to the introduction of the PPSA, will not retain priority, and if registered now will sit in priority behind any other security interest that has since been registered.

Every Landlord should review both pre and post PPSA leases for security interests such as cash deposits and valuable Landlord’s property.

As the PPSA has now been in place for over 3 years a review of it has been completed and a significant number of recommendations have been made as a result of the review. Read the article on the PPSA’s statutory review here

The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.