Security Deposit in a Commercial Lease

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Just like a residential rental or lease, your commercial landlord is going to insist on a security deposit. The security deposit can be used by the landlord for a number of reasons, but most commonly it will be used to cover any damage at the end of your lease if you do not renew your agreement.

Unlike residential laws, there aren't any laws that govern how much a commercial landlord can ask for a security deposit. Your landlord may ask for a very large deposit; how much depends on you bargaining power. Additionally, you landlord may earn interest on your security deposit, and unless you work it into your lease, you won't see any of that additional income.

As a result of the rather lax legal setting, you will want to include (as much as possible) favorable security deposit terms in your commercial lease. Some considerations include:

  • Amount - Obviously you want as small a security deposit as possible, but your landlord will want to make sure it's sufficient to cover any expenses at the end of your lease term.
  • Interest - If the security deposit is substantial, it would be wise to collect interest on it.
  • Deposit as a Cure for Rent Default - You will want to include language in your lease that requires your landlord to deduct from the deposit a missed rent payment, and not to terminate the contract.
  • Letter of Credit - In some cases, you can use a letter of credit rather than cash as a security deposit. You'll need to work that out with your bank and your landlord.
  • Return of the Deposit - Once your lease is up, you're entitled to the security deposit. The exact timing and process though, should be spelled out in your lease agreement.

The articles below address all of these issues and much more.

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