Security accounts

What is a security account?

A security account is much like a joint account whereby any withdrawal requires both parties’ approval. Lending institutions (predominantly banks) all have different terms and conditions around security accounts. However, the key features include:

• Choice of account: Most major banks offer security or joint accounts; the owner should choose the type of account and the lending body where the account is to be held, subject to the builder’s approval.*
• Name of account: The account is generally held in the joint names of the builder and the owner.
• Account authority: Most major banks will require the account holders to authorise how the account can be operated, e.g., operation of the account only on the signature of all parties.
• Credit balance: Generally, the credit balance of a joint account is held jointly by all account holders. The owner is only entitled to any balance in the security account after payment of the contract price.
• Interest: If the account is interest bearing, then that interest is earned by the owner.

*Some lending bodies stipulate that account holders must be individuals, e.g., an account holder must not be a company or a trust.

Answering your owners’ objections

Sometimes an owner will not understand the purpose and effect of a security account and/or request that the clause be deleted. Common concerns raised by owners are:

• Administration: Often lending bodies advise an owner not to agree to a security account or that the process to set up a security account is extremely arduous and administrative.
• Incapacitation, death, or bankruptcy: A common concern raised by an owner relates to the possibility of either party becoming incapacitated or passing away, or the builder becoming bankrupt. While some lending bodies will stipulate what happens in such circumstances, most accounts will allow for the account holders to stipulate this.
  To respond to the owners’ concerns, the builder may consider:
  • Only requesting that the owner deposit the next stage payment into the security account at the beginning of each progress stage;
  • Having two signatories from each side as parties to the security account; and/or
  • Including a special condition in the contract that provides for all monies in the security account going back to the owner in the event of bankruptcy.

Alternative solutions

Ultimately, it is recommended that the parties to a contract speak directly with their preferred lending body regarding security accounts and their associated terms and conditions to consider if this is the best option for them.

Alternatively, the builder and owner may wish to speak with a lending body about a bank guarantee, letter of credit, or consider setting up a trust account with a solicitor.