DCS Lawyers : Commercial & Property Perspective Newsletter 2019

The latest news from DC Strategy Lawyers

How should your lease be best secured?

Landlords of commercial, industrial and retail premises will usually require some form of security from a tenant, in order to protect themselves where a tenant defaults under the lease. There are various forms of lease security that a landlord my request; which are summarised below:

1. Bank Guarantee – This form of security is preferred by landlords because it is a third party undertaking from an entity of substance, and the bank is required to honour any request to drawdown on the bank guarantee, without the need or requirement to obtain the approval of the tenant. This type of security is also unconditional and lasts for at least the length of the lease plus an additional six (6) months following. It is however possible to obtain a bank guarantee without an expiry date, which varies depending on the bank. A bank guarantee will also, where it does not have an expiry, survive the tenant’s insolvency, so in this instance there is limited risk to a landlord that any drawdown of a bank guarantee will be clawed-back as a “preference payment” in an insolvency situation.

2. Cash Deposit/Bond– Landlords do not favour cash deposits because of the administration required for the landlord (or managing agent) to open and administer an account, the funds are actually held jointly on behalf of the landlord and the tenant. This means that in the event of the tenant’s insolvency, a claim can be made by the liquidator/administrator to claim the funds back, even if the landlord properly drew on the cash deposit (for lease breaches) prior to the tenant becoming insolvent. In regard to retail leases, the Retail Leases Act 1994 NSW, for example, requires that the landlord (or managing agent) deposit the cash deposit with the Office of NSW Small Business Commission whereupon a retail bond number is issued. In order to make a claim then on a cash deposit lodged with the NSW Small Business Commissioner, the landlord will need to have the tenant sign the claim form. This may not always be possible if the tenant is in dispute with the landlord, or if the tenant is insolvent.

3. Personal Guarantee – Landlords may sometimes require, in addition to a bank guarantee or case deposit, a personal guarantee from director/s of the tenant company. This requires that the director/s and/or shareholder/s of a tenant company to personally guarantee the lease performance and obligations of the tenant. It is important to consider that the personal guarantee is only as valuable as the worth of the individual giving it; in effect, if they own no assets of value, have assets that are not liquid or have assets that are heavily financed, the guarantee may not be worth enforcing. Unlike a bank guarantee, the personal guarantee needs to be enforced in a court by commencing proceedings against the guarantor.

What is the best option in each circumstance may vary, depending on the type of property/lease and the relationship between the parties. It is therefore, important for a landlord to consider carefully as to the type of security to be requested from a Tenant to ensure the landlord’s interest is protected.

Digital Assets – what happens when you are gone?

Technology is evolving at a fast pace and many people are amassing a wealth of digital assets that are valuable. So, what happens when you die? Who will be entitled to your digital assets?

A digital asset is anything you have rights over that exists online or in digital form. It includes: intellectual property (such as copyrights, patents and trademarks); private emails; digital music libraries; online financial accounts; domain names; and social media accounts. In Australia, there is no specific legislation dealing with the management of digital assets. This means that families have no clear rights in relation to access and ownership, of the online life of a deceased family member.

If a comprehensive list of each digital asset (including all passwords and security questions) has not been left with a digital executor, these assets may remain sealed or left online indefinitely. It is therefore suggested that a comprehensive written list (record the username, passwords and security questions attached to each asset (account)) of all the digital assets and how these are to be dealt with by your executor is made, so that you have some decision in what happens later on. This list of instructions should form part of your wishes when preparing a Will and this should be regularly updated as your situation changes. It is also to your benefit that your Will be professionally drafted by a lawyer who will ensure your wishes are corrected documented in your Will.

Why you (as a Franchisor) need to protect your interests under the Personal Property Securities Act (PPSA)

Many Franchisees upon deciding whether or not to purchase a franchise will often ask for clauses relating to the PPSA to be removed from draft documents. As a franchisor it is never a good idea for you to immediately agree to remove these items as the PPSA can assist you in the following circumstances:

• Where you provide goods on credit to a franchisee;
• Where you lease goods to a franchisee;
• Where you wish to sell a franchise business to a franchisee on a deferred payment basis; and protect its interest in capital equipment provided to the franchisee.

If a franchisor provides goods to a franchisee on credit or lease basis but does not register its security interest in the goods there may consequences to the franchisor, namely

• if the franchisee's financier does register its security interest in the franchisee's assets, then if the franchisee defaults, the financier's security interest will take priority over the interest of the franchisor;
• if the franchisee becomes insolvent or enters into administration, title to assets leased by the franchisor to the franchisee will transfer to the franchisee; and
• if the franchisee were to deal with the leased assets or assets provided on credit, in certain circumstances the third-party transferee of the assets may take them free of the franchisor's interest in the asset.

To avoid such adverse consequences, the franchisor should register its security interest via the PPSA.

Click here to view our legal services

Contact DC Strategy Lawyers to discuss if you have any questions regarding this Newsletter.