Legal Property Experts

in association with Penman Sedgwick LLP

Claire Miller Partner – Head of Property

COMMERCIAL LEASES: RENT DEPOSITS

Landlords of commercial properties often require a rent deposit to be provided by their tenant – either at the time the lease is granted, or as a precondition for the grant of the landlord’s consent to the assignment of the lease.

What is a rent deposit?

A rent deposit is a form of security for the tenant’s performance of their obligations in the lease. It provides the landlord with a readily accessible source of funds that can be used immediately if the tenant breaches any of their obligations in the lease, without having to take legal proceedings. The terms on which the deposit is held should be recorded clearly in a Rent Deposit Deed (“RDD”).

How much should the landlord require?

This is a matter for negotiation, but the amount of the deposit will usually reflect the following:

• the rent payable under the lease

• the length of time it would be expected to take to relet the property

• the perceived level of risk of tenant default.

If rent is payable quarterly in advance pursuant to the terms of the lease (which is usually the case) the landlord would generally require a deposit equal to at least 6 months’ rent so that it covers a minimum of one rental payment, plus any additional sums payable such as insurance and service charge, and any other costs related to the tenant’s default. If VAT is chargeable on the rents the deposit should also include a sum equal to VAT.

Can the deposit be increased?

A well-advised landlord would want to ensure that the RDD provides for the deposit to be increased in the following situations:

• if the rate of VAT increases (assuming the initial deposit included a sum equal to VAT)

• if the landlord exercises their option to tax (assuming the initial deposit did not include VAT because VAT was not chargeable at the time)

• if the rent is increased (e.g. on review).

Withdrawals

and repayment

The terms relating to both withdrawals by the landlord from the deposit and repayment of the deposit (or the balance held) to the tenant should be clearly set out in the RDD. These are likely to include:

• service of formal notice of a withdrawal on the tenant

• obligations on the tenant to top up any sum withdrawn

• triggers for repayment, e.g. assignment (with landlord’s consent), lease expiry and possibly early repayment (subject to financial performance tests being met).

There are various options for structuring a rent deposit, and other important considerations for both parties. They should each take legal advice before entering into a RDD to ensure that their interests are adequately protected.

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