How should a security deposit for a lease be held?

There are several aspects to security deposits that the parties to a retail lease should be aware of when they enter into the lease. Whether you are a landlord or tenant, current or prospective, knowing the ins and outs of security deposits would be advantageous.

Landlords generally require a security deposit as guarantee for the performance of the tenant's obligations under a lease. The funds for the security deposit may be provided by the tenant by way of bank cheque, personal cheque or even cash. The Retail Leases Act 2003 (Vic) stipulates that the landlord must hold a security deposit on behalf of the tenant in an interest-bearing account. Further the landlord must account to the tenant for interest earned on the deposit but the landlord is entitled to keep the interest and deal with it as money paid by the tenant to form part of the security deposit. Essentially the interest is treated as a supplementary payment of security deposit and so the security deposit grows as interest is earned.

An alternative to this is for the tenant to provide a bank guarantee, which the landlord is not entitled unreasonably to refuse to accept as a form of deposit, bond or third party guarantee for the tenant's obligations under the lease. Indeed, landlords can choose to require that the security deposit be in the form of a bank guarantee and they frequently do by including this as a term in the lease.

For more information on security deposits please contact us on 9707 1155.