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A rent deposit is an amount of money paid by a tenant to act as security in case they (the tenant) don’t meet their obligations under a lease. A deposit is a kind of insurance policy for the landlord against the tenant’s defaulting, and is usually required when the financial standing of the tenant is deemed insufficient.

A rent deposit is generally a specific sum, calculated by reference to a number of months’ rent – three, six, nine or twelve. The deposit is put into a designated bank account accessible by the landlord under specific circumstances detailed in the Rent Deposit Deed. Interest on the deposit should accrue to the tenant unless otherwise specified.

But the most important thing, which is all too often missed, is that it should be time-limited. If the company is only, say, two years away from having the “financial muscle” to stand without a rent deposit arrangement, then the deposit will only remain until that can be demonstrated. The deed should specify the exact financial circumstances under which the deposit is repaid and the deed is extinguished.

The downsides of a rent deposit for the tenant include the obvious fact that the deposit can starve the company of cash and potentially cause financial problems. In addition, deposits have been lost when the landlord goes into some form of insolvency. Neither of these is insuperable: the important point is to have negotiated the terms of the rent deposit before the Heads of Terms go to the solicitors.

The main advantage of a rent deposit for a prospective tenant is that it is a fixed sum beyond which the landlord cannot demand and that it avoids the directors having to provide personal guarantees, which tend to be open-ended.

If any of the points raised in this piece give you pause for thought, please talk to Jim – your independent commercial property resource. Offering workshops, mentoring and project consultancy, supporting and advising SMEs on-premises acquisition and helping avoid problems with commercial property leases.

“I know the Landlord, he’s incredibly nice. We get on so well. The agent is really helpful too.”

How many times do I hear that?

My response to that is: I don’t doubt it. I know lots of very nice landlords too, not to mention their equally helpful agents but is that a reason to approach negotiation of the Heads of Terms of a lease any differently?

When a client instructs me to act on their behalf,  then together it is our responsibility to negotiate in the best interests of the company. If we don’t thoroughly negotiate the Heads of Terms, confirmed in writing, we might be in for some surprises later, wasting hard-earned cash and even putting the success of the company at risk.

Of course, we can negotiate Heads of Terms in a civilised atmosphere of mutual respect and collaboration, but let’s not kid ourselves, the process of agreeing terms is fundamentally an adversarial one. We shouldn’t be diverted from our key objectives by existing relationships.

We should focus on the needs of the business as expressed in the business plan and as if the landlord is a complete stranger.

If we follow this course, our property strategy will guide us towards the Heads of Terms we are seeking and we will send a comprehensive agreement to the solicitors that will work for the business – and there you have it, a lease that works in the best interests of the business with no surprises!

If we only agree the length of the lease and the amount of rent, we have left perhaps a dozen other terms and conditions which will not be tailored to the needs of the business. Does that matter?

In a typical commercial lease of about 40 pages, you can expect about 1½ pages to be clauses the landlord agrees to be bound by. They will vary depending on circumstances and they are a topic of another article. The point being that the other 38½ pages will include obligations, liabilities, duties and costs which fall upon the business, as tenant. Is there another contract in which a business owner would leave that much to chance?

It is always easy to negotiate on matters we understand. Money and time are in that category. How much and for how long. Knocking the rent down always feels positive and we may even get some time at the start of the lease before the rent kicks in – rent free period. The landlord has said how long the lease is to be, so that’s OK. But is it?

It is not that common to be in a position to negotiate. We don’t bargain over our trolley of shopping or a tank of diesel so it is understandable that when presented with a contract containing dozens of terms, the business owners may not know where to start to make it work for the business. If you don’t know what you don’t know, you are a bit stuck going forward.

What we can’t do is leave it to our solicitor to sort out. By the time it goes to the lawyers, the deal is agreed – crystallised – and cannot easily be “unagreed”. To try, is a very unsatisfactory and costly, up-hill struggle.

So how does a business owner get to grips with the opportunity a new commercial lease presents, to tailor its terms to the needs of their business? A good starting point is their own business plan. As the road map of a company, the business plan defines a whole range of parameters for the business: what it does, who it sells to, how many staff it employs and what skills they have, what technology it needs and so on. It is equally possible to use the business plan to help decide what premises it needs and the right lease terms.

So, by generating a property strategy from your business plan you can determine the physical attributes of the premises that will best suit your business – where, what size, what equipment; and then the terms it is going to be necessary to negotiate within any agreement – lease or licence, and therefore give your business the best chance of succeeding in its new premises.

Culverwell Consulting advises SMEs and start-ups on the complexities of acquiring business premises, through training, mentoring, full service consultancy, and using 30 years’ experience in commercial property transactions. Call, email or visit the website to find answers to your questions.

A new lease of life: businesses would surely achieve better terms if they knew how

An interesting article in a recent issue of Estates Gazette, by John Forbes QC and Vivien King discusses how commercial lease terms could be improved and clarified. As the vast majority of lease terms are burdens on the tenant, it follows that such improvement and clarification would have the effect of making the lease more realistic and even fairer to the tenant.

A select number of experienced real estate solicitors and support lawyers considered and discussed why lease terms are not evolving and becoming more explicit.

The rather sad summary of the problem [for business] is and I quote “… a landlord … is usually resistant to changes …” and “The client [the business which is about to become a tenant] wants a lease at an agreed rent to be drafted and agreed as soon and as cheaply as possible and apparently is not much concerned about trying to change and improve current practice”.

The article concludes with the massive understatement that this “is arguably not in the long term interest of the property industry.” It doesn’t mention that it is certainly not in the long or short term interest of business occupiers.

For a business to rebalance the landlord and tenant relationship and make the best advantage of its strengths, it needs to understand:

1. Businesses are the critical ingredient in the success of landlord’s investment model, without which that model fails. As such, the business has a strength of negotiating position, which will bring significant value and reward if properly exploited.
2. There are many complex elements to consider, which make up “the right premises” for the business. A well thought through business plan is a good starting point.
3. How the lease permits that business to occupy, can significantly affect the success of the business. The scope for negotiation on a ‘give and take’ basis to obtain the key terms identified in the business plan, will yield valuable results, short and long term.

Commercial property is not on the daily agenda for business owners, unless you are a landlord. This mismatch of familiarity and breadth of knowledge can lead to unequal outcomes for the business but it doesn’t have to be that way.