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 where you, as a tenant, lease commercial premises from a landlord. You use their property for a business purpose in exchange for paying rent. The lease agreement will specify a lease term which is the period you may occupy the premises.

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 obligation within your lease agreement should you fail to meet any of these.

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 which protects the landlord should you become insolvent and protects you if they do, as the money is your property.
2. A trust: This is where the money becomes the landlord’s and is held on trust for you as the commercial tenant. As long as it is in a separate account, you are protected if your landlord becomes insolvent.
3. The landlord’s property: This is where the rent deposit is the landlord’s property, but they can only use it as per the terms of the security deposit deed. 

Rent Deposit Deed

When your landlord insists on a security deposit or rent deposit, a rent deposit deed should accompany this. It will set out when your landlord may use the security deposit and what conditions you need to meet to ensure you receive it back.

You can typically negotiate the rent deposit deed before the start of your tenancy. When you do, there are several factors you may wish to consider, such as:

• the monetary amount of the deposit, which is usually the equivalent of 3–6 month’s rent on the lease;
• whether the rent deposit includes VAT;
• when your landlord will return your deposit, such as assignment, early termination of the lease or expiry of the lease term (it is typically the latter);
• whether your landlord should hold the security deposit in a separate bank account;
• whether you, as the tenant, have your name on the account; and
• how and when this is paid.

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 does need to draw on the security deposit, you will have to 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 in case 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 a cash deposit. 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 terms of the deposit, 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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