Readers of our book, Negotiating Commercial Leases & Renewals For Dummies, will learn (in-part) that although landlords often ask for security deposits on commercial leases, such deposits aren’t legally required. If fact, deposits are negotiable but far too many tanning tenants don’t know this and willingly pay them, without negotiating the amount or the terms. As a tenant, your goal is to pay as little deposit as possible – no deposit at all is better. Deposit money, which generally doesn’t earn a penny in interest, can better serve as working capital for your business rather than for your landlord.
The deposit clause in your lease agreement can contain specific or very loose and simple wording dealing with lease deposit details.
From your standpoint as a tenant, paying a security deposit confers no advantage or benefit. It ties up your money – money that many landlords try hard not to give back to you if you don’t renew your lease. From a landlord’s perspective, a security deposit makes perfect sense as it gives them a chance to recoup some of the money spent on bringing in a new tenant. Acquiring a tenant can be an expensive proposition for a landlord for several reasons. Any deposits a landlord can collect can offset the following costs:
• The commercial space may have sat vacant for some time, bringing in no income for the landlord.
• The landlord may have to offer monetary inducements, such as tenant allowance or free rent to lease the space.
• Landlord’s work (i.e. renovations or upgrades) may be required to make the space suitable for showing and leasing.
• The landlord has to pay real estate commissions, in most cases. These fees can cost a landlord a pretty penny (typically between 5 and 6 percent of the total base rent); however, these commission costs are not your responsibility.
Regardless of how the landlord and their agent handle the incoming tenant deposit, a credit to the tenant remains on the landlord’s books. This credit should be clearly documented in your lease agreement, because it is the record of your deposit. If the landlord sells the building, you may receive an estoppel certificate confirming the basic terms of your lease and any outstanding obligations, including the amount of your security deposit currently being held by the landlord. An estoppel certificate is a document verifying information as true and it’s commonly used to verify facts for a third party.
Landlords typically want to hold the deposit until the lease agreement terminates and the tenant vacates the premises. This happens for several reasons. If the tenant causes damage to the premises, the landlord can deduct those repair costs from the deposit. If the tenant doesn’t remove their lease improvements, the landlord may hire a contractor to do so and deduct the cost from a deposit. If base rent is owing or the landlord has under budgeted or overspent on the operating costs, a Common Area Maintenance (CAM) reconciliation balance can be outstanding, which the landlord can deduct from the deposit. If the tenant doesn’t return the keys or clean the premises, it can result in a deduction from the deposit – all depending on the wording of the deposit clause.
Remember that even though landlords and real estate agents may tell you that the purpose of the security deposit is to provide the landlord with protection in the event that you default on the lease agreement, the real reason is to offset the commission being paid out to the real estate agents.
The deposit clause in your lease agreement can contain specific or very loose and simple wording dealing with lease deposit details. Simple wording isn’t a good idea. You will want to cover every detail, especially when you will get your deposit back so as to prevent arguments down the road. Simply stating the deposit is “X amount of dollars or two month’s rent to be held for the lease term” isn’t nearly enough information. Here are several questions you will need to ask:
How much is the deposit? Most landlords request one to two months’ rent as a deposit. Your financial strength or experience as a tenant sometimes determines the deposit amount.
Is the deposit fully refundable? The fine print of the lease agreement may state that the landlord can apply the deposit to rent arrears or to any damage that you, the tenant, causes to the premises.
When will the deposit be returned? Even if it’s stated as the “60th month” in your lease term, it’s better to have the deposit applied to a specific month. In most cases however, the landlord returns it to you between 15 and 45 days after you vacate the premises, provided that you’ve completed the entire term and not defaulted on the rent.
