A rent deposit deed is a document which sets how a landlord secures a commercial tenant's deposit. This deed sets up as a charging arrangement on the deposit money in the landlord's favour. This means the deposit remains the property of the tenant, but if the tenant defaults on the lease, (eg does not pay the rent) the landlord can take money out of the deposit. It also protects the landlord for losses and expenses, or non-performance of covenants. Use this rent deposit deed to protect your commercial property and to ensure payment if your tenant defaults.
When should I use a rent deposit deed?
Use this rent deposit deed
- if you are granting a lease or sublease
- the property is a business premises
- you want to take extra safety from the tenant for the length of the lease
- the property is in England or Wales
What's included in a rent deposit deed?
This rent deposit deed covers
- the tenant's obligations to pay the deposit
- the landlord's right to withdraw from the deposit
- the tenant's requirement to top up the deposit if a withdrawal is made
- how and when the deposit is returned to the tenant
What's a rent deposit deed?
A rent deposit is a sum of money provided as security by a tenant to their landlord in respect of a commercial property rental. It works in a similar way to rental deposits for residential lettings, but the money is normally held by the landlord and is not administered by a government-backed tenancy deposit scheme. Instead, the rules of the arrangement are set out in a rent deposit deed which state the circumstances under which a landlord can hold on to part or all of the security deposit. In practice, a landlord will only be able to draw upon the money if their tenant breaches the terms of their lease (eg. fails to pay their rent or breaks an agreed covenant).
Do I need a rent deposit deed?
A rent deposit deed provides peace of mind to a commercial landlord, particularly if they are dealing with a new tenant who cannot prove that they have a robust trading record (eg. start up businesses). It gives them a guarantee of easily accessible funds to mitigate any losses should their tenant break any of the rules (covenants) of the lease or defaults on rental payments. But having a rent deposit deed in place is equally important for tenants, as it sets out the specific circumstances and rules under which a landlord is allowed to claim a portion of the rent deposit.
How much should a landlord require as a rent deposit?
Although there are no set rules on levels of rent deposit, the amount will generally be a multiple of the monthly rent, reflecting market conditions (ie. taking into consideration the amount of time it could take to find a replacement tenant). In practice, rent deposits will normally equate to 3 - 6 months worth of rent.
When can the landlord make deductions from the deposit?
There are three main circumstances under which a landlord can make deductions from a rent deposit:
- If the tenant fails to pay their rent owing;
- If the tenant breaks an agreed covenant of the lease (eg. they damage the property or adapt it without agreement); or
- If the tenant fails to uphold a covenant under the lease (eg. they fail to pay the service charge or clean windows).
When will the rent deposit be returned to the tenant?
The landlord must return the entire rent deposit to the tenant - together with any interest accrued - once the tenancy comes to an end, subject to any deductions which have been made as a result of breaches of the lease.
Sometimes there may also be a clause in a rent deposit deed which allows a portion of the rent deposit to be returned to a tenant if they can demonstrate that their financial position or trading record has improved (eg. using a profits test).
Ask a lawyer for:
- for a rent deposit for a residential letting
- if the property is in Scotland
This rent deposit deed is governed by the law of England and Wales.