Protecting your position: security, guarantees and abandoned goods when a tenant becomes insolvent

This is Part Three, and the final instalment, of our series on the practical implications of tenant insolvency.

In Part One, we examine the voluntary administration process and its immediate impact on landlords’ rights. In Part Two, we examined liquidation and receivership and the impact these processes have on landlords’ rights and obligations. In Part Three, we examine three key issues for landlords across all insolvency scenarios: security and guarantees, the Personal Property Securities Act 2009 (Cth) (PPSA), and abandoned goods (will add this bullet to part 1 and 2)

In this article, we explore three key issues that arise in any tenant insolvency scenario and are central to protecting a landlord’s commercial position: security and guarantees, the Personal Property Securities Act 2009 (Cth) (PPSA), and abandoned goods. Addressing these issues proactively before an insolvency event occurs and responding promptly when one does can significantly improve a landlord’s position.

Bank guarantees: the gold standard

Bank guarantees remain one of the most effective forms of security available to landlords. Unlike other forms of security, a bank guarantee is an independent payment obligation of the issuing bank, rather than the tenant. As a result, funds received under a validly drawn bank guarantee are generally not susceptible to recovery claims by a liquidator.

Importantly, provided the conditions for drawdown are satisfied, a bank guarantee can generally be called upon regardless of whether the tenant is in administration, liquidation or receivership. This gives landlords access to a reliable source of recovery that operates independently of the insolvency process and is not typically affected by the statutory stays and moratoriums that apply to insolvent tenants.

However, landlords should be alert to the rise in fraudulent bank guarantees. A bank guarantee should be verified as valid and enforceable upon receipt, and the original document must be secured. An issuing bank will generally require production of the original document and will not honour claims made under a copy.

Security deposits: increased insolvency risk

By contrast, security deposits are significantly more vulnerable in an insolvency scenario. If a landlord calls on a security deposit within the six months preceding the tenant's liquidation, the liquidator may seek to recover those funds as an unfair preference. Where the security deposit remains uncalled upon, there is also a risk that it may be treated as an asset of the tenant, leaving the landlord exposed and potentially requiring it to participate in the liquidation as an unsecured creditor.

For this reason, landlords should, wherever possible, insist on bank guarantees rather than security deposits when negotiating lease security arrangements.

Personal guarantees

Personal guarantees from directors and corporate guarantees from related entities can provide landlords with an additional and often valuable avenue of recovery. Importantly, these rights generally remain available irrespective of an external administration and may be pursued alongside claims arising in a liquidation or receivership (although they are temporarily stayed during any administration period).

To maximise the effectiveness of these protections, landlords should ensure that guarantees are properly documented and drafted to capture the full spectrum of potential liabilities under the lease. Consideration should also be given to the financial capacity of the guarantor, as the value of a guarantee ultimately depends on the guarantor's ability to satisfy a claim. Well-drafted guarantees should extend beyond unpaid rent to cover all amounts that may become payable under the lease, including make-good obligations, outgoings, indemnity claims and damages arising from early termination.

The Personal Property Securities Act 2009 (Cth)

Overview

The Personal Property Securities Act 2009 (Cth) (PPSA) fundamentally reformed the law governing security interests in personal property when it commenced in January 2012, replacing a patchwork of Commonwealth, state and territory regimes. At the centre of the PPSA framework is the Personal Property Securities Register (PPSR), a national online register that enables parties to record and search security interests in personal property.

The two registration types most frequently encountered in practice are an “All Present and After-Acquired Property” (All PAAP) security interest, which extends broadly to a grantor’s assets, and a Purchase Money Security Interest (PMSI), which can provide a secured party with priority in specific circumstances. Importantly, the PPSA applies only to personal property and does not extend to interests in land or to fixtures that have become part of real property.

Why the PPSA matters for landlords

The PPSA is relevant to landlords because personal property located at the leased premises, after it has been disclaimed by the liquidator, is often subject to competing claims from financiers, suppliers and other secured creditors.

While a security interest may be enforceable between the grantor (typically the tenant) and the secured party, it will only be effective against third parties if it has been properly perfected. In practice, perfection is most achieved through registration on the PPSR. Where multiple parties hold security interests over the same collateral (a situation frequently encountered in insolvency administrations), the PPSA establishes a statutory priority regime that determines which claimant is entitled to recover first. Understanding how this priority rules operate is critical for landlords, particularly where disputes arise over ownership of assets located at the premises or the proceeds of their sale.

Registering the landlord's property

At the outset of a lease, landlords should carefully consider whether any landlord-owned property located at the premises and not forming part of the land or fixtures, which is leased to the tenant, should be protected through registration on the PPSR. A failure to register a relevant security interest may leave the landlord exposed to competing claims by third parties, including receivers, liquidators and secured creditors asserting rights over assets located at the premises.

Insolvency appointments frequently give rise to disputes concerning the ownership and priority of interests in property on site. Where a landlord has not taken the necessary steps to protect its interest, it may find itself in a significantly weaker position when seeking to recover or retain control of its own assets. Proper PPSR registration can provide valuable certainty and enhance a landlord’s ability to defend its proprietary rights in an insolvency scenario.

Abandoned goods

The problem

Dealing with goods left behind by an insolvent tenant is one of the most common and complex issues landlords face. What may appear to be a straightforward exercise can quickly become legally complex, requiring consideration of lease provisions, competing security interests under the PPSA, and the applicable uncollected goods legislation in the relevant state or territory.

For landlords, the key issue is that assets located at the premises may be subject to competing ownership claims from the tenant, secured creditors, financiers or insolvency practitioners. Acting too quickly to dispose of, sell or retain those goods can expose a landlord to significant legal risk. Careful assessment of the landlord’s rights and obligations is therefore essential before any action is taken.

Key considerations

When dealing with abandoned goods, landlords should consider the following:

• What are the relevant terms (if any) of the lease agreement regarding abandonment?
• Is the tenant in liquidation, administration or receivership?
• Who owns the goods: the tenant, a related entity, or a third party?
• Who is claiming an interest in the goods (for example, a financier with a registered security interest)?
• Are the goods subject to a security interest registered on the PPSR?
• What are the goods, and what is their value?
• What are the costs and/or losses to the landlord if the goods are not removed from the premises?
• What is the relevant state or territory legislation?

Abandonment clauses

An abandonment clause in a lease can provide landlords with some protection when a tenant leaves goods behind, but its effectiveness is not absolute. Such clauses commonly permit a landlord to treat the tenant's property left at the premises as abandoned and deal with it without accounting to the tenant. Importantly, landlords should not assume that an abandonment clause gives them an unrestricted right to dispose of or retain goods left at the premises.

In many cases, those goods may be subject to a registered security interest in favour of a financier or other secured creditor whose rights take priority. Further, the property may not belong to the tenant at all but instead be owned by a third party who has merely permitted the tenant to use or store it at the premises. In those circumstances, the property may fall outside the scope of the abandonment clause altogether, and any attempt by the landlord to deal with it could expose the landlord to liability.

Before taking any action, landlords should carefully assess ownership of the goods, identify any competing security interests and ensure that any proposed disposal process complies with the relevant statutory requirements. Failure to do so may expose the landlord to claims for conversion, damages or interference with proprietary rights.

Uncollected goods legislation

The legislative regime for uncollected goods is state-based and varies depending on the jurisdiction in which the goods are located. Importantly, the question of whether legislation or the contractual agreement (such as the terms of the lease) prevails also varies by jurisdiction:

In jurisdictions where uncollected goods legislation prevails (ACT, SA and WA) landlords must comply with the statutory regime irrespective of any contrary provisions in the lease. Contractual arrangements cannot override the requirements imposed by the legislation, and failure to follow the prescribed process may expose a landlord to legal risk.

By contrast, in jurisdictions where the parties' agreement takes precedence, a carefully drafted abandonment clause can provide landlords with greater flexibility when dealing with goods left behind by an insolvent tenant. Even so, landlords must not overlook the operation of the PPSA.

The existence of a registered security interest, or competing proprietary claims by third parties, may significantly restrict the landlord’s ability to dispose of or otherwise deal with the property, regardless of the rights granted under the lease.

Key takeaways

As this three-part series concludes, the key message for commercial landlords is clear: preparation before insolvency and decisive action when it occurs are critical to protecting their position. Specifically, landlords should:

• take preventative steps to ensure lease arrangements adequately protect the landlord's rights in the event of insolvency.
• conduct appropriate financial due diligence of the tenant (and any broader corporate group) before and during the lease term.
• obtain bank guarantees as the preferred form of security, and be aware of the increased risk associated with security deposits.
• properly draft abandonment of property clauses in leases, having regard to the applicable state or territory legislation.
• register security interests on the PPSR for any landlord property at the premises.
• actively monitor tenant financial performance and consider taking steps to enforce rights prior to an insolvency event.
• understand that the rights of a landlord vary depending on the type of external appointment; administration, liquidation or receivership, and act without delay to fully understand those rights following any appointment.

If you are a landlord facing issues related to a tenant entering liquidation or receivership, we recommend seeking legal advice from a qualified commercial lawyer. Lander & Rogers' legal experts have extensive experience in this area and can provide tailored advice to meet your specific needs.