When entering a commercial lease as a landlord or a tenant, you will sign a commercial lease agreement. This document contains each party’s rights and obligations under the lease. Sometimes, you may also sign a rent deposit deed in addition to the lease agreement. A rent deposit deed will be useful where a landlord believes their prospective tenant may not adhere to the lease obligations, so they request a sum of money as security. This article will explain key rules regarding rent deposit deeds in a commercial lease.
What is a Rent Deposit Deed?
A rent deposit is a sum of money a commercial landlord may request a tenant pay them at the start of a lease. This sum will protect the landlord and act as a form of security should the tenant fail to uphold any lease provision, such as non-payment of rent.
You should outline the details of a rent deposit in a rent deposit deed. Typically, this is a written legal document attached to the commercial lease agreement. A rent deposit deed will state that although the commercial landlord may physically have the rent deposit, they do not legally own it. Instead, the commercial tenant owns the rent deposit, and it is a charge to the landlord.
Rules Regarding Rent Deposits
There are essential rules relating to rent deposit deeds affecting both the tenant and the landlord. We discuss the key rules below.
Maintaining a Separate Account
When a commercial tenant pays their landlord a rent deposit, the rent deposit deed must state that the money will be in a separate account. Under no circumstances should a landlord place the deposit in their personal account. Keeping the deposit separate can protect the tenant, particularly if their landlord becomes insolvent.
A rent deposit will hopefully remain untouched during the lease term and should earn an interest account. Again, the rent deposit is ultimately the tenant’s money until a tenant defaults on the lease, allowing the landlord to draw on it. Accordingly, a tenant is entitled to any interest earned on it. The rent deposit deed should state a tenant’s right to earn interest. However, a commercial landlord is not generally under an obligation to ensure any specific rate of interest for the rent deposit.
The commercial landlord may pass interest to the tenant yearly or hold it with the rent deposit monies for them. You should outline details of interest payments in the rent deposit deed. However, a landlord would not typically pass interest to their tenants when they are either:
- in default of a provision in the commercial lease;
- forfeit the lease; or
- disclaim the lease.
Withdrawing From the Deposit
A rent deposit deed usually states that the landlord can withdraw from the deposit at any point in the term when the tenant defaults on the lease. However, where the landlord needs to withdraw from the rent deposit, they may have to notify their tenant. Importantly, the deed should detail the relevant notice period. It can include the following:
- the amount they intend to withdraw;
- reason for withdrawal;
- date of withdrawal and
- invoices which relate to it.
The landlord will withdraw what is necessary to cover the lease defaults and can make any number of withdrawals from the rent deposit during the lease term.
Further, when the landlord withdraws from the deposit, the deed should detail that the tenant must top up the deposit accordingly.
Assigning to a New Landlord
There are occasions when a landlord changes part way through the commercial lease. For example, this might occur when the current landlord sells the property to another person. It is helpful if the rent deposit transfers to the new landlord. Notably, your rent deposit deed should detail this point. The rent deposit deed should state how the tenant consents to the landlord assigning the benefits in the deed and, when they do, that the deposit transfers to the new landlord.
Where the commercial tenant assigns the lease, a commercial landlord may ask the new tenant, the assignee, for a rent deposit.
This cheat sheet outlines what you should be aware of in your lease agreement.
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Some commercial leases have a rent deposit deed attached to them. This legal document details the rules regarding a deposit from the tenant to the landlord. If your lease agreement included a rent deposit deed, ensure you place the deposit in a separate account. You may also detail whether this account can earn interest and how a landlord can pass interest onto the tenant. Be sure your deed outlines when and how a landlord can withdraw from the deposit. Finally, outline what should happen if a landlord changes part way through the commercial lease.
If you need help understanding the rules relating to rent deposit deeds, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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