Show me the Money! (a.k.a. Security for Leases)
May 28, 2010
What You Need to Know
Have you ever wondered about the different types of security available for leases? Guarantees and indemnities are often confused for each other, but there are several important differences. A guarantee is a secondary obligation, since it does not survive the disclaimer of the tenant’s lease in a bankruptcy. An indemnity, on the other hand, is a primary obligation which, if properly drafted, will survive the bankruptcy of a tenant and the disclaimer of the lease. The indemnifier is jointly liable with the tenant to perform the tenant’s obligations under the lease.
Tenants can also provide deposits as security for leases. A rent deposit is one option. This is collected by the landlord and applied towards rent at specified times during the term, such as first and last months rent. A security deposit is collected as security for the tenant’s performance of its obligations under the lease and may be applied against non-rental defaults, such as repairs or unpaid utility bills at the end of the term. There are important considerations for landlords and tenants when drafting agreements for rent and security deposits. Landlords should be concerned about issues such as the replenishment of a security deposit and how much time they have after the expiry of the lease term to fulfill any restoration obligations before returning the security deposit to the tenant. While tenants will also be concerned about the return of the security deposit, they must also consider other issues, such as whether interest accrues on the deposit.
Landlord may also opt to use a general security agreement (GSA) or PPSA registration as security for their leases. A GSA grants a security interest in certain defined collateral, usually the assets of the tenant, to secure the tenant’s covenants under the lease. As a secured creditor, the landlord can claim against the property in priority of other creditors. Landlords and tenants should be aware of the importance of careful drafting before entering into any type of security agreement.