The Ins and Outs of a Commercial Property Lease Deposit

Not all deposits were created equal. If you are interested in renting commercial property and have questions about what a commercial deposit entails, read on for some insightful information.

A deposit is a predetermined sum of money that a tenant must pay their landlord in advance, prior to occupation of the commercial premises. The landlord keeps it in a trust account, to be used as security for any rent defaults, unpaid services or accounts, or property damage during the course of the lease. 

The deposit amount takes into account the property location, property size, the tenant's financial strength, and any other specific terms negotiated between the parties involved.

Below we outline some of the key components of a commercial property lease deposit, as well as some frequently asked questions.

Why Are Commercial Lease Deposits Higher Than Residential Deposits?

Commercial lease deposits are higher for a number of reasons:

Higher risk: Commercial properties are regarded as higher risk compared to residential properties, in terms of wear and tear, likelihood of property damage, etc. 

Complex operations: Commercial operations can be more complex with different risk factors associated with them.

Property modification: Adjustments often need to be made to the property, depending on the tenants requirements in terms of layout, installations, or infrastructure.

Liabilities: Commercial operations often come with higher liability risks, such as accidents, property damage, or legal disputes. 

Financial stability: A higher deposit provides landlords with a greater level of financial security and reassurance, should the tenant face economic fluctuations, industry-specific challenges, or market uncertainties.

How Exactly Do Commercial Lease Deposits Work?

Specified deposits 

It is common for tenants to simply pay a once-off deposit to act as security for any risk or repair. However, best practice recommends that the lease outlines three separate, specified deposits:

• One for rental
• One for damages
• One for services

The commercial lease should have clearly defined clauses that outline these deposits and their uses. Specified deposits will prevent the landlord from using the full deposit on any of the above mentioned situations. That way, the tenant would simply replace the portion of the deposit to ensure the full amount is available at the end of the lease period.

Determining the deposit amount

A commercial deposit is usually the value of two months' rental, but the final agreement is decided between the landlord and tenant. After 12 months, it is standard practice to top up the deposit amount in line with the rent increase. This top-up must be agreed to and outlined in the lease agreement.

Interest 

While the law states that landlords are to keep residential deposits in interest-bearing trust accounts, returning both the deposit and the interest accrued to the tenant at the end of the lease, commercial landlords follow slightly different rules. They are required to keep the deposit in an interest-bearing account, but they are not legally required to return the interest gained. These terms need to be outlined very clearly in the lease agreement. 

Return of the deposit

The timeline for the return of the deposit must be clearly outlined in the lease agreement, based on whether the property is in a satisfactory condition at the end of the lease. Should the premises require extensive repairs or if there are accounts in arrears to be settled, the landlord would make use of the deposit to settle those costs.  

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