What is a rent deposit?
Usually, to provide security for the payment of rent or the performance of a tenant’s covenants in a lease, a landlord can require a deposit of money to be paid by the tenant.
Rent deposits are attractive to landlords as they provide an immediate source of money in the event of non-payment of rent or a breach of the lease covenants. The deposit can save the landlord from having to take legal proceedings to recover any debt as the rent deposit money is accessible (with an obligation on the tenant to top the deposit back up, if the landlord has to use it).
Rent deposits are also advantageous to tenants as they prevent having to use alternative forms of security such as personal guarantees, which involves the tenant taking personal responsibility behind a limited liability entity, therefore their personal interests are protected.
A rent deposit is usually required by a landlord on the grant of a lease or before a landlord gives their consent to the assignment of a lease if:
- The tenant is a company located overseas, with few UK assets;
- The tenant shows signs of a weak financial position;
- A tenant’s covenant strength is weak and insufficient to the landlord.
Issues to consider
Whilst there is no prescribed amount required for a rent deposit; they are usually between three to twelve months’ worth of the annual rent. The value of the rent deposit will be determined by the value of the rent under the lease, the period taken to find a new tenant, and the risk of the tenant defaulting.
Landlords may be authorised to deduct from rent deposits if there is: unpaid rent, service charges, if a landlord suffers a loss due to a breach of any covenants in the lease or the lease is terminated earlier than the term. It is deemed reasonable for a landlord to give notice to the tenant before making any deductions so that they can rectify any actions.
The following may trigger the repayment of a rent deposit: a lawful assignment, an expiry of the term, a surrender or an option to break in a lease. A tenant may also prove that they can meet their financial obligations under the lease and have not been in breach of the tenant covenants to receive their rent deposit back.
How are rent deposits held?
Rent deposits can be structured in several ways. The most common structures are as follows:
- The money is held by the landlord on behalf of the tenant in a separate account. The tenant will have ownership of the money but will grant an equitable charge over it in favour of the landlord, or
- The funds will be held on express trust for the tenant.
The most appropriate structure to hold rent deposits will depend on the individual circumstances of the landlord and tenant.
Rent deposit deed
A rent deposit deed sets out the terms on which a landlord can draw from a rent deposit, how it is to be held, and the conditions that must be satisfied for the monies to be repaid to the tenant.
The assistance of a solicitor should be obtained to draft this document to ensure that it is a valid document tailored to the circumstances of the parties involved
Article written by Ryan Palmer