Rent Deposits: Key considerations for a Tenant

Upon entering into a new lease or taking an assignment of a lease of commercial premises, it is common for landlords to request security from tenants in the form of a rent deposit. This is particularly common where the tenant is a new start-up company with no trading history, or where the tenant cannot provide evidence of previous profitable trading history. 

In such circumstances where a rent deposit is requested, a ‘Rent Deposit Deed’ will be drawn up to be signed by both the landlord and the tenant. More often than not, however, such a deed will be drafted in favour of the landlord. Tenants should therefore make sure that consideration is given to the following points, so as to ensure maximum protection for their rent deposit: 

Consider – how should the rent deposit be held? 

There are several ways a rent deposit can be held. The two most common are: (1) where the deposit is paid into an account in the landlord’s name and is charged by the tenant in favour of the landlord (the “Charging Route”) or (2) where the deposit is paid into an account in the landlord’s name and then held on trust by the landlord for the tenant (the “Trust Route”). Both theCharging Routeand theTrust Routewill protect a tenant from insolvency/liquidation of the landlord. However, the tenant should still note the importance of informing the landlord’s bank that the money does not belong to the landlord, so that the bank does not consolidate this particular account with other accounts belonging to the landlord. 

Alternatively, as a third option, the deposit can be held by a third party stakeholder (such as the landlord’s solicitor) but this can create a conflict of interest for the stakeholder (as well as creating an administrative burden) and as such is much less common than the first two options. 

Consider – the Trust Route 

As referred to above, going down the Trust Routeprotects the tenant in the event of the landlord’s insolvency, in that the deposit should not pass into the hands of the landlord’s liquidator/trustee in bankruptcy. In order to ensure that this is indeed the case and that the tenant’s deposit is therefore adequately protected, the tenant should check that the deed contains wording to the effect that “the landlord acknowledges receipt of the deposit from the tenant and undertakes to place the deposit in the Account [to be defined] as soon as reasonably practicable / within two days of the deed being entered into.”

Consider – how long should the deposit be tied up for? 

Landlords may want the deposit to be available to them until the end of the term of the lease. However, tenants should try and ensure that the deposit is returned to them following a lawful assignment/subletting of the lease to a new tenant. Alternatively, a tenant could request a return of their deposit following the end of a fixed period during which the tenant has not defaulted on payments or obligations due under the lease, although this is less common. 

Consider – what happens if the landlord sells? 

If the landlord decides to assign its interest in the lease at any point, normally the landlord’s benefits, as well as obligations under the deed will automatically be assigned to the landlord’s successor. If not, however, the tenant should ensure that the landlord arranges for its successor to enter into a covenant (an obligation) with the tenant to perform all its obligations as landlord under the deed. However, notwithstanding the automatic transfer of obligations or the fact that a covenant has been obtained, unfortunately for the tenant, it will have no say in the identity of the landlord’s successor and will have no guarantee that the successor will be reliable and trustworthy. Consequently, if at all possible, the tenant should try and ensure that the deed provides that the original landlord will remain liable for obligations under the deed notwithstanding the fact that the landlord has assigned its interest.