A commercial lease deposit Is used to ensure that cash is available for the landlord if a tenant fails to pay rent or doesn't make any other payments that are required by the lease. A residential landlord in a lot of states isn't allowed to request more than two or three months worth of rent to hold for a deposit.

A commercial landlord, on the other hand, can set the deposit amount that they want. This means desirable tenants who have good credit and a good business history have the opportunity to negotiate a lower commercial lease deposit amount. This is especially true if the tenant is renting a long-vacant space.

Differences Between Residential and Commercial Lease Deposits

There are a lot of important differences in the ways that commercial security deposits and residential security deposits are collected, retained, and finally disposed of when the lease ends. A commercial property owner has more freedom when it comes to negotiating security deposits than residential landlords have. There aren't any restrictions on how much a landlord can charge for a commercial security deposit. The amount is decided only by how much the market allows.

Controls Over Commercial Lease Deposits

  • There are a few forms of control placed over what a landlord can do with a tenant's deposit in a commercial lease, which is also referred to as key money.
  • The landlord can't demand payment from a tenant as a condition to starting a commercial lease, continuing it, or renewing it unless the payment amount is defined in the written agreement.
  • If the landlord is passing attorney's fees that were involved with preparing the lease on to the lessee, that also has to be clearly defined in the lease.
  • Unless it's specified in the lease, the landlord can't increase the deposit amount during the lease's term.
  • The funds also cannot be used to pay the tenant's last rent payment.
  • The landlord is expected to give the deposit back at the end of the lease, after subtracting any deductions for things like the cost of repairs for damages.

It's common practice for the landlord to deduct the cost of repairing damages you caused, but haven't fixed, from the deposit when you vacate the rented property. The money from the deposit can also be used if the landlord needs to make repairs to the property, that you caused, while you are using it. Most commercial deposit clauses will note that the landlord is permitted to use the money from the deposit if the tenant doesn't pay the money that is owed under the terms of the lease.

Deposit Clause in the Lease Agreement

The landlord can use the money from the deposit and is permitted to terminate the lease unless the clause detailing the terms of the deposit in the lease contract clearly notes that landlord isn't permitted to do that. As a tenant, if possible, you want to have it in the contract that the landlord would use the deposit first to reimburse himself or herself for anything not paid by the tenant. It protects you if you have it written so that the landlord doesn't have the choice of terminating the lease.

If a contract says your deposit funds can be used to cover any unpaid money that you owe on the lease, you'll want to get it in writing on the lease. If a landlord accepts these terms, he or she will most likely require that this right can be extinguishable if you have large or frequent defaults on rent payments.

There is no law requiring landlords to put deposit money in the bank, and the landlord is not required to pay interest on money earned from deposits. While the ideal thing for your landlord to do is put the deposit in a separate bank account, it's up to the landlord, and how much bargaining power you have, whether that becomes part of the contract or not. Under the relaxed legal setting that rules over commercial lease deposits, as a tenant, you should try to negotiate the best security deposit terms possible for your individual commercial lease.

If you need help with a commercial lease deposit, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.