Commercial Rent Deposit Deeds – What Are They And Why Are They Important?

When business owners think about moving the location of their business, often the terms of the Lease are the first thing that is discussed, understandably so.

As well as agreeing the annual rent, length of the term and each party’s obligations for repairing and insuring the property, often a Landlord will require some additional security from the Tenant by way of a rent deposit.

A rent deposit is a way for the Landlord to secure an advance payment to be used if the Tenant fails to pay the rent reserved under the Lease or fails to comply with other obligations in the Lease.

It sensibly follows that the use of this security is also formally documented and supplemental to the Lease is the Rent Deposit Deed.

What should a Rent Deposit Deed include?

As with any formal document, the exact provisions of the Rent Deposit Deed are to be negotiated between the Landlord and Tenant, but in summary the Rent Deposit Deed will cover 3 key matters namely:

The amount of security agreed and although this is negotiated between the Landlord and Tenant it is often between 3 – 6 months of the annual rent;

The circumstances when the Landlord is permitted to withdraw funds from the Deposit upon notice given to the Tenant including the amount withdrawn, the date of the withdrawal and the reason for the withdrawal.

Following any withdrawal, the Tenant is obliged to top-up the Deposit so that it is no less than the minimum amount agreed (usually the initial rent deposit agreed); and

The return of any remaining deposit to the Tenant at the end of the Lease term. At the end of the Lease term, any remaining deposit should be returned to the Tenant in good time. It is important to set out when it should be returned to avoid any issues.

Where the Lease is renewed, the deposit can be rolled over for the additional new term, although it is good practice for the parties to enter into a Confirmation Rent Deposit Deed.

Holding the deposit by charge or by trust

The two most common ways of holding a rent deposit are by charge or by trust.

By holding the deposit by charge means that whilst the rent deposit is held by the Landlord, it belongs to the Tenant and the Tenant grants a charge over the deposit in favour of the Landlord. If a Tenant becomes insolvent, the Landlord has the benefit of this charge as a secured creditor. At the end of the contractual term of the lease, the charge expires, and the money is repaid to the Tenant or otherwise dealt with via a new Deed if the Lease is to be renewed. 

In comparison, holding the deposit by trust means that the Landlord holds the deposit and becomes the owner of the deposit. It is therefore held on trust for the Tenant who has the beneficial interest. Accordingly, the Landlord is placed under a fiduciary duty to the Tenant, including for example a duty to ensure the deposit earns a reasonable interest in the holding account. 

Due to this fiduciary duty, the trust method can be seen as more Tenant friendly whereas the charge method can be viewed as more Landlord friendly, as it provides the Landlord with easier access to the rent deposit funds. 

Clearly, the individual circumstances of each party will determine the form of the Rent Deposit Deed. 

In Conclusion

Rent Deposits continue to be desirable for Landlords, especially where they are granting Leases to new Tenants. Striking a balance between the competing interests of the Landlord and Tenant is crucial for any commercial lease transaction.

If you have any queries or would like to discuss any matter relating to commercial property, please do not hesitate to contact a member of our commercial property department.