Commercial Property Rent Deposits – Some Good News
In the current economic client where potential tenants have not had the best of financial results, landlords may be presented with unsatisfactory sets of accounts from proposed tenants of commercial properties.
Also with many “Phoenix companies”, willing to take on leases or new start up companies unable to show any track record in respect of their ability to pay rents, and landlords wanting to avoid having to pay on empty property, the safeguard of the landlord taking a rent deposit from a company tenant, as collateral security often provides the solution to allow a transaction to proceed and a lease of commercial premises to be granted.
The common forms of rent deposit deeds that are used follow one of two methods. The first being monies paid over to the landlord who holds it on trust, therefore the rent deposit becomes the property of the landlord and is only returned to the tenant under the provisions of the rent deposit deed, when it then becomes the property of the tenant. The provisions of the rent deposit deed will usually provide that on an event of insolvency of the tenant, the rent deposit is forfeited and there is no obligation on the landlord to repay the rent deposit back to the tenant.
Tenants are therefore somewhat nervous of these provisions and the second method is that the rent deposit, although paid over to the landlord, still remains the property of the tenant, but the landlord takes a charge over the rent deposit, so that he has security, similar to a mortgage, and therefore has priority over any other creditors in respect of the rent deposit sums should the tenant become insolvent.
As the second method creates a charge given by a company tenant the current scheme, which has largely been unchanged for more than 100 years, requires the charge to be registered at Companies House within 21 days of creation.
New regulations are likely to come into force on 6 April 2013 which should bring modernisation to the scheme for registering UK company charges.
There will be a single registration scheme for charges created by UK companies and LLPs irrespective of their place of incorporation (including Scotland, although some provisions do not apply to Scottish companies / LLPs).
The new regulations will provide that all charges will be registrable at Companies House unless exempt. Registrable charges are defined in new Section 859A(7) of the Companies Act 2006 and include a mortgage, a standard security, an assignation of security and a series of debentures.
Therefore there is no need register charges in rent deposit deeds as these are one of the exemptions under new Section 859A(6)(a) which states that the registration requirements do not apply to a charge if it is “cash taken or held by a landlord as security for the due performance and observance of a tenant’s obligations under a lease of land”.
Charges in rent deposit deeds will still be effective security but will not be recorded in a public register. A search at Companies House will no longer reveal charged rent deposits created after the regulations come into force.
In order to protect themselves against a tenant’s insolvency and practitioners being unaware of a charged rent deposit account, landlords are more likely to insist on having the rent deposit account in their name and under the control, possibly under the first method as referred to above.
The new regulations will still apply to companies that have mortgages and debentures (unless one of the four exemptions apply), and although criminal sanctions have been removed for non-registration at Companies House, there will remain a commercial incentive to register as those not registered will continue to be invalid against a liquidator, administrator or creditor of the security provider if not registered within the 21 day time limit. Also, companies do not need under the new regulations to keep their own registers of charges. However copies of the full document creating or evidencing the charge will need to be kept and made available for inspection and non-compliance will result in criminal sanctions that could be imposed on the company and every company officer in default.
It is envisaged that the new regulations will provide clarity and savings as less due diligence will need to be undertaken with regard to ascertaining whether or not charges have been registered, and since registration will not be required in respect of rent deposit deeds there will be a registration fee saving.