What is a Security Deposit for a Commercial Lease in the UK?

Committing to a commercial lease in the UK can be a significant responsibility and expense for your business. Not only will you need to make rent payments to your landlord, but you will have several legal obligations in the lease you must perform. Your commercial landlord may wish to protect against your potential failure to comply with these and ask for a security deposit to protect them from loss. This article will explain security deposits in the UK.

What is a Commercial Lease?

A commercial lease is when you, as a tenant, lease commercial premises from a landlord. You use the property for business purposes in exchange for paying rent. The lease agreement will specify the lease term, which is the period you may occupy the premises, as well as the rights and obligations of each party.

There are different types of deposits, the most common kinds being holding deposits and security deposits. In commercial leasing, it is more likely that the landlord will ask you, as a tenant, to provide a security deposit. 

What is a Security Deposit?

A security deposit or rent deposit is the money you pay a landlord before they grant a lease to start the tenancy. It acts as security for your rent payments and your legal obligations within your lease agreement should you fail to meet any of these. For example, if you cause damage to the property or contribute to the landlord incurring any losses, the landlord may withdraw sums from your deposit account. 

A security deposit for commercial premises usually comes in various forms:

1. a charge: this is where the rent deposit is in a separate account, creating a form of security interest. This arrangement protects both parties in case of insolvency;
2. a trust: this is where the landlord holds the money on trust for you as the commercial tenant. It is usually kept in a separate account and released when mutually agreed upon between the parties. As long as it is in a separate account, you are protected if your landlord becomes insolvent; or
3. the landlord’s property: in this case, the rent deposit is the landlord’s property and is held in one of their accounts. However, the landlord can only use it in accordance with the terms of the security deposit deed. 

A lease security does not always have to be a cash amount in one of the formats above. Instead, it may be in a different form, such as a:

• bank guarantee;
• bank bond;
• director guarantee; or
• bank letter of credit.

Rent Deposit Deed

When your landlord insists on a security deposit or rent deposit, a rent deposit deed should accompany it. The deed will determine when your landlord may withdraw the security deposit and what conditions you must meet to ensure repayment.

The deposit often corresponds to a certain rent sum, usually 3-6 months’ worth. It can also exclude VAT, which should be calculated on top of the base sum. Tenants should note that the deposit is often payable before completion, which means full payment must be made to the landlord before the lease can start. 

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Another necessary provision is deposit repayment, which can occur in different circumstances. The most common scenario is repayment at the end of the lease when its term expires. The deposit should also be returned if the lease is assigned or terminated early for any other reason. The deed will also set out a timeline for repayment. 

Why Have a Security Deposit?

Your landlord will likely require a rent deposit when they grant you a lease or assign a lease to you for specific reasons. These may be:

• that your covenant is weak and needs something to strengthen it;
• that you may not have any or only a few UK assets as your company is not in the UK; or
• you are a relatively new business, so you cannot provide evidence that you can be a good commercial tenant.

A security deposit is advantageous to your landlord, and they do not need to rely on legal proceedings to recover amounts you may owe or losses they have incurred because of your non-compliance. If your landlord needs to draw on the security deposit, you must top it up so it remains at the same level throughout your tenancy. 

Key Takeaways

Before you commit to a lease agreement for your business in the UK, your landlord may ask for a security deposit. This protects them if you do not fulfil your obligations in the lease agreement, such as paying your rent. A security deposit can come in various forms but is usually cash. The three main types of monetary security deposits are a charge, trust and the landlord’s property. Where you have to provide a security deposit, a security deposit deed will accompany it, which you must pay for. This will detail the deposit terms, and you should consider these as you negotiate it before you commit to your lease.

If you need help understanding security deposits for commercial leases in the UK, 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 for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.

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