Wherever a Landlord has concerns regarding the financial strength of a prospective Tenant, it is likely the Landlord will ask for a rent deposit. Typically the deposit asked for will be equal to the value of 6 months rent plus VAT (but there is no agreed level, it is a matter for negotiation).
Unlike residential rent deposits, rent deposits are held by Landlords not by a third party. While some Landlords act properly, other Landlords are unscrupulous and treat rent deposits as useful pots of money to be used regardless of the tenant’s behaviour.
Here are our Top Tips for Tenants on Rent Deposits:
Negotiate the Amount
Typically Landlords ask for a rent deposit equal to 6 months rent plus VAT (and the VAT element often comes as a rude shock to tenants) but as with most things in commercial leases the level of rent deposit can be negotiated – so see if a lower rent deposit is acceptable. But be realistic – if your financial strength is low the Landlord will still want a significant deposit. Remember that you may be able to swap a reduced rent free period at the start of the Lease for a lower rent deposit.
Offer Alternatives to the Landlord
Landlords may be happy to take a guarantee rather than a rent deposit. These can be company guarantees (often from companies in the same group), personal guarantees (be wary of giving an unlimited personal guarantee!) and bank guarantees (which can be costly, take time to put in place and often require you to place an amount equal to the sum guaranteed on deposit with the bank).
Get it back as soon as possible
Generally rent deposits should be returned soon after the end of the Lease or when the tenant assigns the Lease with the Landlord’s consent. But be careful – some Landlords try to keep hold of the deposit while the assignee is the tenant (on the basis the previous tenant is guaranteeing the assignee’s obligations). This is not reasonable – just say no!
Also, if your Lease is 5 years or more and or you have a year of solid profits already, ask for the rent deposit to be returned when you can show a solid continuous level of profitability – generally 3 years audited accounts showing net annual profits more than three times the rent.
Be careful of your dilapidations liability in your Lease
The biggest exposure for Tenants is that at the end of the Lease the Landlord simply dips into the rent deposit to settle any dilapidations liability regardless of the fact the premises are left in repair and relies on the Tenant’s reluctance to litigate.
There is no complete safeguard against this but consider ensuring that the Lease contains a cheap 3rd Party dispute resolution clause to settle disputes without the cost of court action. Also NEVER agree a provision where the Landlord can charge you rent after the expiry of the Lease while they sort out any dilapidations.
Protect your Rent Deposit from Landlord’s Insolvency
Rent deposits are needed because Landlords are concerned about tenant’s financial strength. However tenants should be aware that their rent deposit can be at risk if the Landlord becomes insolvent.
It is important for the Tenant’s protection that the rent deposit is placed in a separate account and is NOT intermingled with the Landlord’s general funds. Furthermore the rent deposit deed should expressively state that the rent deposit remains the property of the Tenant and is charged to the Landlord. This also avoids any risk of the Bank itself seizing the money as a “set-off” against money the Landlord may owe the Bank.