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The Do's and Don'ts of paying a Rent Deposit under your Business Lease

Our easy guide will help you avoid any pitfalls.

If you are looking to take a lease of premises from which to run your business, whether it’s a shop, an office, a warehouse or some other type of premises, and you have little or no trading history then the landlord may want you to pay a rent deposit. If that is the case, beware of the following:

  • The landlord may state that he will return the deposit at the end of the lease term or once you have transferred your lease but you should try to agree that you will get the rent deposit back after, let’s say, two years, if you have paid your rent on time. By this time you would have proved to the landlord that you are a good tenant.
  • Make sure that the landlord places the deposit into a separate account that contains only your deposit monies. The landlord should not be allowed to invest your deposit or let it intermingle with other funds as, if the landlord becomes insolvent, you could rank at the end of a long list of other creditors that could make it unlikely that you will get your money back.
  • Paying a deposit that equates to three months’ rent is normal and you should be paying six months’ rent at the most.These days, and in East Kent, paying a deposit that equates to twelve months’ rent is excessive and you should argue your case.
  • Make sure that the bank account in which the landlord deposits the rent is interest bearing so that when you get the rent deposit back, you should also get the interest that has accrued.
  • Check the actual repayment date – you want to get the deposit back within ten to twenty working days, the landlord should not keep hold of the deposit longer than is necessary.
  • The landlord can usually deduct monies from the deposit for non-payment of rent or a persistent breach of the lease. However, the landlord should not deduct monies without giving you notice or for anything minor.
  • Beware of rent reviews! If the deposit equates to a certain number of months’ rent and that rent is then increased on the rent review date, you will be expected to ‘top-up’ your deposit to ensure that it equates to that number of months’ rent as increased on the review date.
  • Beware of VAT! Even though a deposit is not vatable, if the deposit has to equate to for example six months’ rent and VAT is payable on the rent then that will almost certainly mean that you have to pay a deposit of six months’ rent plus an amount equivalent to VAT.
  • Check whose name the rent deposit account will be opened in. Ideally, whilst the account would be opened by the landlord, it should bear your tenant name to ensure that the deposit remains your property.

Ultimately, if you are thinking of taking a new lease of business premises, you may want to budget for having to pay a rent deposit as this is a far better alternative than a personal guarantee which could run for the duration of the lease.

Should you have any further queries or require assistance, please contact our Commercial Property Team who will be happy to help.

Before relying on this commentary please read the Reliance on information posted section in our Terms of Website Use in our Legal section. Please note that specialist advice should be taken in relation to any specific queries and the information above is provided for general information purposes only.

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Commercial Property

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