March 23, 2021
As a landlord you will naturally be keen to ensure that your tenant pays the rent and any other costs on time and that, if not, there is a legal mechanism to recover those costs as easily as possible. This can be achieved by a number of different means:
The most common method of security is to require a rent deposit to be made by the tenant. This a sum of money deposited as security for payment of the rent and also for the performance of the tenant’s covenants in the lease. The deposit is set up via a deed and this document will detail when the landlord may be entitled to draw on the deposit and under what circumstances the money may be returned to the tenant. Rent deposits are attractive to landlords because as soon as the tenant is in breach of a covenant in the lease, the landlord can withdraw the appropriate sum without further legal proceedings. Landlords typically request a rent deposit when they perceive the tenant to be financially weak, have limited assets in this country or the tenant is a new business with no track record of financial probity. The following aspects of the rent deposit should be borne in mind:
Size of Deposit
The size of the rent deposit can be chosen by the landlord and is typically anywhere between 6 and 12-months’ rent. This figure can also include main rent, insurance rent and service charge with VAT applied as applicable.
Top-up of the Deposit
The deed may also direct that the deposit is kept topped up in the event of increased charges or a change on the VAT rate; this may impose an extra administrative burden on the landlord so should be considered carefully. Otherwise, there will be provision made for the tenant to top up the rent deposit if the landlord has to make a withdrawal from it. The landlord will be entitled to withdraw monies equivalent to the payments that should ordinarily have been made by the tenant or to recompense the landlord for any costs, expenses or loss suffered as a result of a breach of any of the tenant covenants in the lease. Because of the additional statutory protection afforded to tenants’ payment of rent because of coronavirus, the situation regarding top ups may be more complex and you should consult with your solicitor before making any such demands. In any case, the tenant should be given notice of any planned deductions.
Return of the Deposit
The rent deposit may be returned to the tenant upon assignment of the lease. Note that a landlord may make it a condition of approval for such an assignment that the new tenant takes out a rent deposit as well. The deposit will also be returned on the expiry of the lease or if it is terminated early by mutual agreement. Any interest accrued on the deposit monies belong to the tenant and are typically repaid periodically if they have not been required for any topping up.
Alternatives to a Rent Deposit Structure
A landlord may have other ways of achieving financial security over the lease as follows:
Bank Guarantee and Bonds
Landlords could require that the tenant agrees with their bank that they will provide a guarantee or bond. Under this system if the tenant defaults, the bank will agree to pay any financial shortfalls. This option is good for landlords as any tenant insolvency issues are not passed onto them. Tenants typically are less keen on this option as they will often have to lodge funds with the bank thereby removing any cash flow advantages and additionally they may have to pay charges for the arrangement.
Parent Company Guarantees
If the tenant has a parent company, an arrangement can be set up where the parent agrees to indemnify the landlord. This can be an attractive option for a tenant as it will generally not be required to deposit funds with the parent. Landlords may be more wary of this approach as adequate security depends on the financial standing of the parent or should the parent be a foreign company, there may be concerns about enforcing the guarantee.
Under this approach, directors agree to indemnify the landlord against tenant defaults under the lease. This option may not be attractive to a landlord unless the guarantor has adequate funds which a charge can be placed over. The guarantor may also be unwilling to place their personal assets at risk.
There are a variety of ways of structuring how security for the landlord, especially rent deposits will be controlled and how differing levels of protection are available to either the landlord or the tenant. Our commercial property team will be able to explain the pros and cons of each approach to you when drafting the rent deposit deed.
Wallace Robinson & Morgan Limited are based in Solihull & Dorridge and serve clients across Birmingham and the West Midlands, Warwickshire, Worcestershire and further afield. Our team of Company and Commercial Lawyers are happy to help if you would like advice about rent deposit deeds, guarantees or other forms of security.
If you would like to discuss your matter, please call 0121 705 7571 and ask to speak to a member of the Company and Commercial law team or email us at firstname.lastname@example.org
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