Rent deposits and Commercial Leases

Its Sod’s Law that just as new start ups require all the financing and capital they can get hold of, the Landlord will produce a Rent Deposit Deed before granting a Lease. In this scenario some points to note are as follows:-

The Rent Deposit Deed is usually entered into between the Landlord and the Tenant and the deposit is a completely separate payment to the first instalment of rent.

The level of Rent Deposit is often the equivalent of the first quarter’s rent (three months’ rent) but it can vary depending on the length of the Lease, amount of rent and also other factors. The Rent Deposit is usually paid immediately before the Lease completes. If the Landlord has to make a withdrawal, the Tenant will have to top up so that the Rent Deposit remains at the agreed level.

Typically the Landlord will hold the Rent Deposit until the Lease ends. If the Tenant assigns the Lease (with consent) the new Tenant will most likely be required to enter into a replacement rent deposit. Few Landlords will agree to an early release from a Rent Deposit Deed.

Where a Landlord has opted to tax a property, VAT will be payable on the rent. As such it is common practice for Landlords to require the Rent Deposit to include a sum equivalent to the VAT on the Rent Deposit. This safeguards the Landlord’s position vis-a-vis VAT should the Tenant fail to pay rent. However, the VAT liability does not arise on completion, but when the Landlord makes a withdrawal to satisfy unpaid rent. It is therefore unnecessary for the Landlord to produce a VAT invoice when it makes a withdrawal, as the Tenant should already have been provided with a VAT invoice.

It is of utmost importance that the Rent Deposit is held in a separate account from the Landlord’s main bank accounts. If possible, the account should be in the name of the Landlord and the Tenant. Failure to separate deposit funds risks such funds being part of a general pot of assets, should the Landlord become insolvent, often resulting in the Tenant losing its deposit.

A Tenant should endeavour to ensure that the Rent Deposit only relates to rent and not any other payments that may be disputed between the parties. Service charge or dilapidations are common areas of disagreement between a Landlord and Tenant and a Tenant would not wish a Landlord to be able to withdraw deposit funds for these amounts.

Although the Tenant has no access to the Rent Deposit, the Landlord should account to the Tenant for interest earned on the Rent Deposit.

Despite having a Rent Deposit Deed, it is worthwhile to note that the Landlord can still seek additional protection, for example a Guarantor, especially if the Landlord has concerns about the Tenant’s ability to comply with the obligations in the Lease.

This article has been produced for general information purposes and further advice should be sought from a professional advisor.

If you require any further advice in respect of the content herein please contact a member of our Commercial Real Estate Team.