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.