Rent Deposits – should you agree to them?

When you are negotiating the taking of a new commercial lease or an assignment of an existing lease the landlords or their agents often try and insist that you should pay a rent deposit equivalent to anything from three months to one year’s rent.  The payment of such monies can obviously affect the cashflow in your business. 

The rationale behind the request is the landlord wishes to ensure that if you do not pay the rent he can have easy access to money to meet the shortfall.  Whilst this is good for the landlord it is not necessarily good for the tenant who has in the past always paid rent monies on time or whose new business is profitable enough to ensure that rent payments are made on time.

Historically, the requirement for a rent deposit was only when the landlord was not sure that the tenant would be able to pay the rent.  However, in recent years landlords and their agents have increasingly started to demand rent deposits even when the tenant has a very good “track record”. 

The purpose of the rent deposit is to protect the landlord against the potential risk which he is taking when a new tenant moves into the premises of that tenant not paying rent due under the lease on time. 

If you have never been in business before then it is not unreasonable for the landlord to require a rent deposit.  In such a situation it is matter of negotiation as to how much rent should be held in the deposit account.  It is normal that at least three months rent should be held but most landlords would insist upon at least six months.  It is worthwhile arguing against paying more than six months on the basis that even if you were to default on a payment of rent this could easily be met from the rent deposit and there would still be another period of three months that the landlord would have in order to take action against you for example forfeiting the lease and re-let the premises.

The other point to bear in mind is the period during which any rent deposit should be held.  Again on the basis that it is only covering the landlord against potential problems realistically if you have been in occupation for a period of say three years and paid your rent and other monies under the terms of the lease on time during that period the landlord really should not continue to hold your deposit.  However, once again landlords and agents have increasingly started to try and have the deposit held for the full term of the lease.

Therefore, if you are thinking of taking a new lease and you have not been in business previously you should try and negotiate that the rent deposit is for no more than a sum equivalent to six months rent and that it should only be held for a period of up to three years subject to your paying, during that time, all the monies as and when they fall due.  You should note some landlords whilst agreeing to the principle of this may well require that you are able to produce evidence at the end of, for example, the three year period that the net profits of your business are at least three times the amount of the rent.

However, if you have been in business for some time and occupying leasehold premises and can show that you have always paid your rent and other monies as and when they fell due and can provide references from your current landlord, your bankers, accountants and one or two people with whom you trade showing that you do pay and meet your obligations then you should argue against paying any rent deposit or, if you have to pay one, it should only be for a sum equivalent to three months held for a period of one year. 

For more advice in relation to this or any other commercial matters please contact Courtyard Solicitors LLP.