Rent deposit deeds for commercial properties

Borneo Martell Turner Coulston

1st August 2019

Legal Briefing

Borneo Martell Turner Coulston

By Mohammed S Rahman

Solicitor

Borneo Martell Turner Coulston

WHEN a landlord and tenant wish to enter into a lease for a commercial property, it is common practice for a deposit to be paid by the tenant to the landlord and that to be recorded by way of a rent deposit deed.

A rent deposit deed is a document which is completely separate from any lease and the deposit payable is separate and in addition to the first instalment of any rent under a lease. This type of document will usually set out how the deposit is to be held, when it can be released and when the landlord can take payment from the deposit.

The amount or level of the rent deposit is usually the equivalent of a quarter's rent (three months' rent). However, this can change depending on the length of the lease or the amount of rent payable under the lease (as well as other factors). The rent deposit is usually payable immediately before the completion of a lease. In the event that the rent under the lease is subject to VAT, then the rent deposit will also be subject to VAT.

During the course of the lease, if the landlord and tenant agree that the rent is to be increased (i.e. through a rent review), then the tenant may be required to pay a top up towards the deposit. This top up is usually made up of the equivalent of the proportion of the difference in rent.

In the event the landlord has to make a withdrawal from the rent deposit, e.g. due to the rent not being paid they the tenant on time, then the tenant will be required to replenish the amount that has been withdrawn within a certain period of time.

Usually, the landlord would hold the rent deposit until the lease ends. However, if the lease is assigned by the tenant (following the correct procedure under the lease) then the assignee will most likely be required to enter into a similar rent deposit deed.

From a tenant's perspective, to avoid any potential disputes, a tenant may wish to ensure the rent deposit only relates to the rent and not to other payments that may be due to the landlord, e.g., service charge payments.

From a landlord's perspective, a landlord may wish to seek to include to provision to recover costs, such as professional fees in relation to recovering rent arrears when using the funds held by way of rent deposit. For example if a deposit of three months' rent is held and the tenant pays monthly but failed to pay last month's rent, the tenant may find that the landlord has taken the equivalent of a month's rent from the rent deposit account and also a further amount to cover any professional fees the landlord may have incurred.

It is important that the rent deposit is held in a separate account from the landlord's usual bank accounts. For ease of reference, ideally a new account should be opened up in the name of the landlord and tenant or in the landlord's sole name along with a reference to that specific tenant. Failure to separate deposit funds risks the deposit monies to become part of a general pot of assets and should the landlord, for example, become insolvent, this will result in the tenant losing his deposit.

Even though a tenant will not have access to the rent deposit during their time as tenant under the lease, the landlord should account to the tenant for any interest earned on money that is held in a rent deposit account.

It is also important to remember that despite there being a rent deposit deed, a landlord is still able to seek additional protection in relation to the lease, for example, if the landlord has concerns about the tenant's ability to comply with their obligations within the lease, by way of extra protection they may require a guarantor is nominated as well as a rent deposit being paid.

If you would like any further advice or information in respect of the above or with any commercial property transactions contact Mohammed S Rahman, Commercial Property Solicitor, Borneo Martell Turner Coulston on 01604 622101 or email mohammed.rahman@bmtlcaw.co.uk

Borneo Martell Turner Coulston