In any lease agreement, the landlord typically requires the tenant to provide a security deposit. This serves as a safeguard or guarantee to ensure the tenant fulfils its obligations while occupying the premises. Retail leases in Australia are governed by different laws in each state and territory. It is crucial for tenants to understand how landlords can utilise the security deposit during the lease term and the timeline for its return. This article explores acceptable forms of security in a retail lease, the purposes for which the landlord can use the security deposit and the procedures for its return.
What Forms of Security Are Acceptable for a Security Deposit?
1. Bank Guarantees
The most common form of security that tenants opt for is bank guarantees. In this arrangement, a bank or other lending institution issues a written letter promising to cover the monetary amount required by the landlord on behalf of the tenant.
Tenants typically prefer bank guarantees because they perceive it as safer to provide upfront cash to the bank for a guarantee rather than directly to the landlord. However, banks and lending institutions impose an establishment fee and ongoing service fees, which may exceed $500 annually.
2. Cash Bonds
On the other hand, you can choose to pay a cash bond to the landlord. However, if the landlord requires a high form of security, up to six months’ rent, this can impose a financial strain and burden on you. Therefore, you may prefer to utilise the available cash elsewhere (opportunity cost). However, providing an upfront cash bond eliminates the need for paying additional fees or charges, unlike a bank guarantee.
Furthermore, state and territory laws impose stricter regulations on cash bonds in a retail lease compared to bank guarantees. Therefore, it is the responsibility of the landlord to comply with the requirements for handling cash bonds. This can typically involve depositing them with a state bond board. For this reason, many landlords also opt for a bank guarantee.
What Can Your Landlord Use the Security Deposit For?
Your lease will set out what the landlord can use the security deposit for. Generally, the security deposit is used to compensate the landlord for any loss and damage suffered due to any breach caused by you. This includes overdue rent or make good any damage to the premises caused by you.
However, some state retail legislation is more specific in what a landlord can use the security deposit for. For example, the retail law in the ACT states exactly what the landlord may only use the security deposit for.
This can be used as guidance when you are negotiating with the landlord. These include:
- the cost of repairs and restoration of the premises damaged by you;
- any overdue rent and recoverable outgoings;
- any interest incurred;
- legal costs associated with the lease preparation, negotiation and ancillary costs; and
- overdue insurance premiums.
In most circumstances, where the landlord has to use the security deposit, you will be required to top it up to the required amount. In addition, it is common for the landlord to require a ‘top up’ annually as the rent increases.
Continue reading this article below the formHow and When Can Your Landlord Return Your Security Deposit?
1. New South Wales
Security Deposit
When the landlord deposits the security deposit with the New South Wales Government’s Retail Bond Scheme, after completing your obligations at the end of the lease, you can apply to the landlord to pay out the security deposit.
Bank Guarantee
The landlord must return the Bank Guarantee within two months of completing your obligations at the end of the lease.
2. Victoria and Australian Capital Territory
Security Deposit
Landlords must deposit security deposits in an interest-bearing account. At the end of the lease, the landlord must return the security bond to you within 30 days.
Bank Guarantee
At the end of the lease, the landlord must return the security bond to you within 30 days.
3. South Australia
Security Deposit
This is subject to the lease.
Bank Guarantee
The landlord must return the bank guarantee to you within two months of the lease ends.
4. Queensland, Western Australia and Tasmania
Both the security deposit and the bank guarantee are subject to the lease.
This guide will help you to understand your options when you purchase a business with leased premises.
Key Takeaways
Security deposits are a common form of security in retail leases. The landlord will rely on the security if you default on payments or breach the lease. Therefore, it is essential to know the following:
- what type of security deposit suits your business; either a bank guarantee or a cash bond;
- what are the requirements for landlords to comply with retail lease legislation; and
- when the landlord should return the security deposit to you when the lease ends.
Retail lease legislation also covers the following:
- when the landlord must deposit the security deposit; and
- how the security bond is calculated.
As a tenant, you should understand your obligations and rights under the retail lease. If you have any questions, our experienced leasing lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
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