Rent Deposits & Personal Guarantees
Commercial rent deposits have traditionally been for 3 or 6months of the headline annual rent. The tenant pays the deposit just before the main lease completes. If the landlord charges VAT on the rent, they will also need to collect a sum to represent the VAT on the deposit.
The Landlord will normally hold the deposit in a designated bank account, with no tenant access, with interest ultimately accruing to the tenant. The agreement for the deposit will be stated in the lease or in a separate rent deposit deed.
The Landlord holds this deposit until the lease ends and can use it in cases where the tenant defaults on rent payments or in cases where the tenant breeches covenants and causes the landlord expense. The Landlord must notify the tenant in writing of the amount and the reason for any withdrawal.
If the landlord has to make a withdrawal from the rent deposit or if the rent increases following a rent review, the tenant will be required to make a payment to top up the value of the rent deposit so it remains at the agreed number of months or amount.
When the lease is legally ended the deposit is returned to the tenant with interest minus any agreed deductions. Alternatively if the tenant assigns the lease, the ingoing tenant or assignee, is expected to at least cover the existing deposit and may be required to increase the deposit if not of the same covenant strength.
a. Tenants with weak covenants:
New or recently formed businesses often fall into this category it is advisable to take as much deposit as you can agree but the traditional amount is the equivalent of 6
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