Before a lease is entered into between a landlord and a tenant, a rent deposit deed is usually entered into between the parties. This is a completely separate payment to the first instalment of rent, whenever that is to fall due. The document will set out how the deposit is to be held, when it is to be released and when payment can be taken from it by the landlord.
In a normal situation the rent deposit will be held by the landlord until the cessation of the lease. If the lease is assigned by the tenant, the new tenant will most likely be required to enter into a new Deed themselves.
Early release and disputes
Some situations may be negotiated between the tenant and the landlord for the rent deposit to be released early. These situations may include where the lease has been assigned or whether the tenant has managed to negotiate that it is not held for the full term and he/she/they have shown they are trustworthy and have fully complied with the lease. Frankly, few landlords will agree early release in these circumstances.
Typically, the rent deposit is a number of months rent, typically 3-6 months depending upon the length of the lease and other possible factors. This amount will usually include VAT as well, as long as the rent charged by the landlord is subject to VAT.
If the landlord and the tenant agree to an increase in the amount of rent that is to be charged through a rent review, the tenant may be obliged to increase the amount held by the landlord as a rent deposit. The same is true if the landlord has to utilise monies from the rent deposit account in which case the tenant may well be obliged under the terms of the deed to replenish the amount to the agreed deposit level.
To seek to avoid disputes, a tenant ought to try and ensure that the rent deposit only relates to rent and not other payments that may be due to the landlord and which may be disputed. For example, dilapidations or service charges disputes are common areas where a tenant may not agree with a landlord and the tenant would not want the landlord to be able to utilise deposit funds for these payments. The landlord may also seek to include costs, such as alleged lawyers or other fees, relating to rent arrears, when utilising funds held by way of deposit. So, for example, the deposit may be 6 month’s rent and the tenant may be late in a quarter rent payment but may find that the landlord takes more than one quarter rent from the deposit account to pay fees.
Important points for tenant
Whilst the tenant will have no access to the rent deposit, which is usually held exclusively by the landlord, the landlord should account to the tenant for any interest earned on the money that is held.
It is also extremely important that rent deposit funds are held in a separate account from the Landlords main bank accounts and recommended that such account is in the name of the landlord and tenant. Failure to separate and earmark deposit funds can mean that if the Landlord becomes insolvent, the deposit funds simply go into a pot of assets and the tenant may lose the deposit in those circumstances.
If the tenant has provided a rent deposit the landlord is still able to seek further protection if they believe that the tenant will have an issue complying with their obligations within the lease. An example of the extra protection which may be sought by a landlord would be a guarantor.
If you need advice on a rent deposit deed or any other commercial real estate or commercial lease issue, get in touch.
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