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Lease Security Deposit – Caution is Required when Premises are Managed by the Landlord

June 24, 2019 by Gessica Giordano

When a tenant enters into a lease for commercial premises the landlord will normally require a security deposit for the performance of the tenant’s obligations. The security deposit will either be in the form of a bank guarantee or cash.

If the security deposit is paid by cash and the Retail Leases Act 2003 (Vic) (“the Act”) applies to the lease, the Act provides that the security deposit must be held by the landlord on behalf of the tenant in an interest bearing account and the landlord must account to the tenant for the interest earned on the security deposit.

If the premises is managed by the landlord and it is unaware of its obligations under the Act, problems can arise at the end of a tenancy when it must return the security deposit to the tenant, particularly under a long term lease. If the landlord does not keep proper records it may be unable to verify if or when the security deposit was paid or be able to account for the interest earned.

If the tenant is also unable to verify the payment of the security deposit, a dispute may arise between the parties about whether the money was paid and how much is owing to the tenant.

To avoid such disputes both parties should maintain proper records. The tenant should seek written confirmation and evidence from the landlord that the security deposit has been invested in an interest bearing account at the commencement of the lease and at the beginning of each further term of the lease to ensure the landlord complies with the Act and that the security deposit is not used for other purposes which could also result in the landlord not having the money available to return the security deposit to the tenant at the end of the tenancy.

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