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What is the benefit of having a rent deposit?

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Most landlords expect some form of security from tenants who are new companies, either in the form of a personal guarantee from one or more of the directors, or by the tenant providing a rent deposit (for the landlord to use in the event of non-payment of rent or other monies due, damage to the property, breach of covenant or other losses incurred by the landlord). 

Rent deposits are typically given to the value of either 3 months’ or 6 months’ rent. The exact amount of the rent deposit is a matter for negotiation between the landlord and the tenant. The trading history of the tenant can be taken into consideration, as can the type of property/building which is being let. If the tenant is a young company with no trading history in the UK the landlord is likely to want greater security. 

The timing of the return of the rent deposit is also a matter for negotiation. In some circumstances landlords are willing to return deposits to tenants if the tenant can prove at least 3 years of trading accounts at or above a certain level (provided, of course, that the tenant has been paying the rent and is not in breach of any of the other covenants in the lease). Tenants would need to agree this with the landlord at the outset as the date and mechanism for the return of the rent deposit would need to be included in the rent deposit deed.   

There are advantages of rent deposits. It is easier for the landlord to deduct monies from the deposit to make good any breaches or non-payments than having to pursue a guarantor. For a director of a new company, providing a rent deposit as an alternative to giving a guarantee protects their personal interest as (provided that the director has not acted wrongfully or unlawfully)  the landlord’s only recourse will be to the company who is the tenant itself and the entitlement to deductions from the rent deposit.

It is important for both landlords and tenants to carefully consider their position in the circumstances and the advice of a surveyor and/or solicitor can be obtained to assist with the negotiations. When the terms have been agreed, it is important to ensure that a rent deposit deed is entered into detailing how the deposit is to be held, when it is to be returned to the tenant and the basis on which the landlord is entitled to make any deductions. A solicitor will be able to draft a suitable document which is bespoke to the particular transaction.

If you are a landlord or a tenant and require any advice please do not hesitate to contact the Commercial Property department.

This article is not a definitive statement of the law. It is designed as a free update on the law at the time of publishing. It is not a substitute for legal advice on specific facts and circumstances. BakerLaw LLP and/or the writer accepts no liability or responsibility for reliance on this article and recommends that you seek independent legal advice on your specific circumstances prior to taking any steps.