The purpose of a rent deposit in a commercial lease is simply to provide security for the landlord for the performance of the tenants obligations under a lease. In practice commercial rent deposits are often fraught with legal and practical complexities. Unfortunately in many cases where a tenant assigns a lease or a landlord sells its reversion the rent deposit deed is overlooked altogether or is dealt with as a mere after thought.
The problems that then arise for the landlord may include being unable to access the deposit funds or an insufficiency of funds to remedy the tenants failure to meets its contractual obligations.
For the tenant the following problems may also include the inability to access the deposit funds or the loss of deposit funds where a landlord becomes insolvent.
As with most aspects of commercial leases the settlement of the provisions that bind the parties will often depend on their respective negotiating power and the prevailing market conditions. However broadly speaking the landlord will be seeking to achieve:
1. Adequate sums of liquid cash so as to be able to meet rent, VAT and all other outgoings easily for the period of the lease or for as long as may be required in the event that the tenant falls into insolvency;
2. The landlord will want to ensure that the sums deposited are secure against other creditors in the event of the tenant’s insolvency. This requires a charge over the fund which must be properly authorised in order to protect the landlord’s position;
3. Related to these points the landlord will want to achieve complete control over the fund in relation to withdrawal of funds and the closure of the fund. Similarly the landlord will want to ensure that the costs of the set up and operational costs of the deposit fund are minimal and that the tenant will be responsible for the tax on any interest earned on the fund;
4. Finally the landlord will want to ensure that they have the ability to pass on the benefits of the rent deposit to any successors in title.
By contrast, the tenants aims will be:
1. Ensuring that the landlord cannot misappropriate the deposited funds;
2. To minimise the deposit fund as far as possible and to ensure the release of the funds as quickly as possible;
3. Security of the deposited funds against any creditors of the landlord in the event of the landlord’s insolvency;
4. To limit the grounds on which the landlord is entitled to have recourse to the deposit fund.
In many cases the landlord and tenant will each have their aims in mind at the time of entering into the agreement. What is often overlooked are the “what if” scenarios that may arise. In many cases the contracting parties will simply protect the deposit as a matter of routine, never really considering what might happen in the event that they need to claim on it or resist a claim on it. Often the purpose of the deposit, to provide clarity and prevent litigation, is undermined by the failure to consider all of the scenarios that might arise with the result that litigation unfortunately follows. Perhaps the key point to bear in mind is not what the contracting parties think the agreement means but what a judge several years in the future may consider that it means.