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.

Your Security Deposit in a Commercial Lease

There are very few laws that govern the use and amount of security deposits in a commercial lease, so you'll want to ensure you've got clear terms in your lease agreement.

How Landlords Use Security Deposits in a Commercial Lease
Your landlord may ask for a security deposit to assure that cash will be available if you fail to pay the rent or don’t make other payments. Unlike residential laws in many states that limit security deposits to two or three months’ rent, commercial landlords may set whatever deposit amount they want. You may be able to negotiate the dollar amount and more favorable terms if you are a desirable tenant with impeccable credit and business history.

Using a Letter of Credit (Not Cash) for a Security Deposit
Cash is by far the most common type of security—and it’s what most landlords prefer. But it’s not the only way to satisfy the landlord’s requirement that you provide a cushion. The most common alternative is a letter of credit, which banks refer to as a "standby letter of credit."

Getting Your Security Deposit Back When Renting Commercial Space
When your lease comes to an end you’ll be entitled to the return of the deposit, less any sums that the landlord has properly withheld. Many leases do not clearly spell out how and when the landlord will return the money to you but you may be able to negotiate on the timing and procedures for the return of your deposit.

Guide from Nolo

Your landlord may dispute how much, if any, of your security deposit should be returned. This guide can help.

Get Your Security Deposit Back

Worried your landlord won't return your security deposit? Download this eGuide and get the facts on your rights. This helpful eGuide provides information on:

how to avoid fights over deposits
reasonable deductions
suing your landlord if all else fails