Friday, February 17, 2012

Security Deposits/1st & Last Month's Rental

Next segment in our Leasing Series…Security Deposits/1st & Last Month's Rental.

Deposit monies on typical commercial lease agreements can take 2 forms. The first is a basic security deposit and the other would be based on 1st and last month’s rent being paid upfront – both being due at the time of entering into a lease agreement.

With a security deposit, the Landlord often requests it to ensure the Tenant maintains and returns the space at the end of the lease term, in the same condition it was received. Detailed inspections of the condition of the premises at both the time of lease commencement and termination, should clearly be a priority given the implications it has on any security deposit. Grounds for forfeiture of a security deposit, should be clearly understood by both parties and well defined within the lease agreement.

Two months rental in advance (most often 1st and last month’s rent) is typical in a commercial lease, where the landlord wants some additional security in the form of a second’s months rent in advance. This effectively ensures some coverage for the landlord, albeit 1 month, in the event of non-payment of rent and a future default by the Tenant.

Other things to consider with either form of deposit:

1. Is interest payable?
2. Is the lease automatically terminated, if a deposit is liquidated?
3. Is notice required, if it is liquidated?
4. Must the landlord hold it in a separate account?
5. Is it protected in the event of sale of the property by the landlord
6. How does it affect the Tenant’s cash flow? (ie, large premises)

As with everything in commercial leasing, all terms are up for negotiation and deposit requirements will vary from deal to deal. In the case of large multi-national tenants, they for the most part are not willing to advance deposits (beyond a first month’s rental), and generally have any such requirement waived based on their covenant.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in working through the area of deposits with respect to your transaction. To learn more about our experience and background click here.

1 comment:

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