LEGAL CORNER: Commercial rent deposits – a guide for landlords

As a landlord you may be concerned about what will happen if your tenants breach any obligations in the lease.

Whilst it is never nice to start a new relationship thinking that it will go wrong, landlords should consider, when negotiating new terms, whether asking for a rent deposit would be appropriate in the circumstances.

A rent deposit is a sum of money paid to the landlord as security for payment of the rent and performance of the tenant’s other covenants in the lease.

A rent deposit deed will usually be prepared, by the solicitors, to detail the circumstances in which you can draw on the funds and also, sets out the conditions that must be satisfied for the deposit to be returned to the tenant.

Q: When might you ask for one?

A: landlord may require a deposit on the grant of a lease or as a condition to consenting to the assignment of an existing lease. Usually, it would be because of one of the following:

:: The tenant is of weak financial status;

:: The tenant has no track record of generating the necessary funds to pay the amounts due; or

:: The tenant has minimal UK-based assets.

Q: What are my obligations?

A: Depending on the way the governing deed is structured, the landlord is usually obliged to place the deposit monies in a separate account in joint names with the tenant. Bear in mind that the funds are not the landlord’s to keep and can only be used in limited circumstances and providing the procedure set out in the deed is followed. Interest accruing on the deposit belongs to the tenant which creates an administrative burden.

Q: Are there any alternatives?

A: Where the tenant does not want to tie up a capital sum, there are alternatives that are available, consider:

:: A personal, parent company, or other third party guarantee; or

:: More unusually, a letter of credit or a bank guarantee/bond.

Rent deposits are a useful tool to help mitigate risk of taking on certain tenants. The attraction is that the concept gives the landlord an immediately accessible source of funds that can be withdrawn as soon as the tenant is in breach of a particular covenant in the lease. There is no need to take legal proceedings to recover the debt or secure performance of the obligation.

By Danii Jhurry-Wright

Partner, Commercial Property department

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George Ide, LLP

Solicitors of Chichester and Bognor Regis

Telephone 01243 786668

Email: observer@georgeide.co.uk