A brief guide to Rent Deposits on Commercial Leases

Just when a new business needs all the capital it can gethold of, their landlord asks for a rent deposit before granting alease. Some key points to be aware of are:

1. The rent deposit is paid to the landlord immediatelybefore the lease completes. This is in addition to the firstinstalment of rent (rent is paid in advance and the firstinstalment can typically be for up to 3 months` worth ofrent).

2. Usually, the landlord will hold the rent deposit untilthe lease ends. However, if the tenant assigns the lease to anotherparty (with the landlord`s consent) then this will also end thearrangement (although the landlord may well require a replacementrent deposit from the incoming tenant). In some cases, the landlordmay be prepared to agree that the rent deposit arrangement will endsooner if the tenant can demonstrate a certain level of net profitover a defined period (e.g. a net profit that exceeds three timesthe annual rent over a period of three consecutive years) but thiswill be up to the landlord.

3. The level of the rent deposit is typically the equivalentof a set number of months` worth of rent (e.g. 6 months). If thelandlord charges VAT on the rent, they will also want to collect asum to represent that VAT with the rent deposit. If the landlordhas to make a withdrawal from the rent deposit or if the rentincreases following a rent review, the tenant will be required tomake a payment to top up the value of the rent deposit so itremains the equivalent to a set number of months`rent.

4. Whilst the landlord will usually have to account to thetenant for interest earned on the rent deposit, the landlord willhold the rent deposit in a landlord's bank account - the tenantwill have no access to this money. If the tenant breaches thelease, the landlord will make a withdrawal to cover the value ofthe breach/any associated expenses and notify the tenant of theamount withdrawn and why.

5. When the rent deposit comes to an end, the landlord willreturn the balance to the tenant. The balance will include anyinterest earned on the deposit. However, if tenant has breached thelease, the landlord will deduct a sum to cover thesebreaches/associated expenses from the balance before returning itto the tenant.

6. Sometimes, the landlord may require the tenant to grantthem a charge over the rent deposit. If so, then the landlord willwant to register a charge against the tenant company at CompaniesHouse.

7. If the landlord still has concerns about the tenant`sability to comply with their obligations in the lease, then theymay look for additional protection as well as a rent deposit. Forexample, they may require the tenant to provide aguarantor.

Please note that this Summary is intended for informationpurposes only and is not intended to act as a substitute forindependent legal advice. If you are intending to enter into alease/rent deposit deed, then it is important that you takeindependent legal advice in relation to your particulartransaction.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.