Landlords can request a rent deposit for a commercial property when a tenant rents a property. During this process, the question ‘do commercial property deposits have to be protected’ often arises.
In this blog, we’ll explore everything you need to know about whether commercial property deposits need to be protected or not.
Commercial property rent deposits can be required on a case by case basis and a lot of factors are involved in a Landlord requesting a commercial rent deposit. For example, the covenant strength of the Tenant or the value of the rent payable under the Lease.
Any rent deposit payable by a Tenant will be used to cover any losses that the Landlord may incur during the lease term.
Deposits are usually calculated based on a certain number of months of rent. It’s important to note that commercial and residential rent deposits do not work in the same way.
Unlike residential rent deposits, commercial rent deposits do not need to be registered with a Tenancy Deposit Scheme (TDS).
How commercial rent deposits are dealt with are by entering into a rent deposit deed which provides protection for both the landlord and the tenant.
Commercial property landlords will keep the tenant's deposit and return it at an agreed date in the future, providing that all terms of the lease have been fulfilled.
If any damages are present the landlord will be able to use the deposit to cover them as well as any losses, as long as this was set out within the limits of the agreement.
A rent deposit deed protects the Landlord by setting out how the Landlord may use the rent deposit to cover breaches of the Lease by the Tenant.
The rent deposit deed will set out the specific circumstances under which the Landlord can deduct monies from the deposit and they typically include the following:
The Rent Deposit Deed will also include a mechanism obliging the Tenant to “top up” the rent deposit where the Landlord has deducted sums from the deposit ensuring that the Landlord has the agreed amount of deposit at all times.
The Rent Deposit Deed will set out the terms upon which the Landlord must hold the deposit and, as above, the circumstances in which the Landlord can deduct from the deposit ensuring that all parties are clear and there are no disputes in the future.
An important part for a Tenant to consider is that commercial rent deposits should be placed into a separate account to the Landlords or their agents personal or business accounts to ensure the funds are kept safe and secure.
The Financial Services Compensation Scheme (FSCS) provides automatic protection for monies held in eligible UK-authorised banks, building societies, and credit unions, up to a limit of £85,000 per person. To ensure this coverage applies to the rent deposit deed, the rent deposit deed will need to specify that the deposit should be held in a separate UK clearing bank account in the name of the Tenant.
It’s important to note that storing the deposit in a separate account isn’t an obligation unless it is referred to in the rent deposit deed.
The Rent Deposit Deed will also specify when the Rent Deposit will be returned to the Tenant. See below for further details.
It’s always a good idea to get a solicitor involved in this process to ensure the terms of any rent deposit deed are fair and reasonable. At Legal Clarity, our Commercial Property Solicitors are here to help! Get in touch with us today.
There are a number of consequences when you don’t protect a commercial property deposit, such as:
You can negotiate with the Landlord on when they will return the rent deposit to you. The usual position is that you will get the rent deposit back upon the earlier of the lease ending or you validly assigning the lease.
Other relevant agreements may include a Landlord returning the deposit if the tenant's net profits exceed three times the rent for three consecutive years. It is all a matter of the bargaining strength of the Landlord and Tenant.
It is important to note that the Landlord will return the deposit to you after they have deducted all monies due in accordance with the terms of the rent deposit deed.
If the Landlord has opted to tax the property, an additional 20% VAT-equivalent sum is payable on the deposit. No VAT invoice is issued, as VAT applies when the Landlord withdraws funds. The Landlord must retain this amount to cover any VAT on deductions, which can surprise some Tenants. It is always important to ensure you ask a Landlord about this before agreeing to the terms.
For guidance and advice on getting the best outcome for your circumstances under a commercial property rent deposit deed, get in touch with us today to see how we can help you.