Rent Deposit Deeds: checklist for commercial landlords

By Isabella Mason

Solicitor

08 May 2024

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What is a rent deposit deed?

A rent deposit deed documents an agreement between a landlord and a tenant in respect of a sum of money (usually between 6 and 12 months’ rent) deposited by a tenant when it takes a lease, as security for a landlord against non-payment of rent and performance of the tenant’s covenants in the lease.

A rent deposit is often given where a lease is assigned and the incoming tenant is unable to provide evidence of a satisfactory financial position.

A tenant must ensure that the rent deposit account contains a minimum balance, which is usually not less than the amount of the initial deposit. If there is a shortfall between the minimum balance and the account balance, a landlord may ask the tenant to make a top-up payment.

What should a rent deposit deed include?

A rent deposit deed should include the circumstances in which the landlord is entitled to draw down on the deposit. These circumstances may include:

• Where the rent and any other sums due under the lease are unpaid;
• any losses, expenses or costs incurred by the landlord in relation to a breach of any of the tenant covenants;
• mesne profits in relation to forfeiture or disclaimer of the lease;
• reasonable costs and expenses for marketing the property for reletting purposes;
• reasonable fees and expenses of any agents or surveyors in connection with the reletting of the property;
• reasonable costs and expenses of legal advisers in connection with the reletting of the property; and
• bank charges incurred in connection with the deposit account.

How is the rent deposit held?

There are different methods of structuring rent deposits. The structure that a landlord and tenant agree to will be dependent on the circumstances of the parties.

The most common methods of structuring a rent deposit are:

1. The landlord holds the deposit in a separate account controlled by the landlord on behalf of the tenant who owns the deposit and charges it in favour of the landlord.

This structure enables a landlord to retain control of the account. In the event that a tenant becomes insolvent, the landlord has the benefit of the charge and will be a secured creditor up to the amount of the deposit.

Depending on the terms of the rent deposit deed, if the tenant goes into administration and stops paying rent, the landlord can draw down on the rent deposit to cover rent payments. However, a landlord may want to think carefully about the timing of drawing down on the rent, as a landlord is unable to claim a top-up of the rent deposit as an administration expense from an administrator.

• The landlord holds the deposit on trust for the tenant in a separate account controlled by the landlord. Under this structure, the landlord is the legal owner of the deposit and holds the deposit on trust for the tenant, who has a beneficial interest.

Similarly to when the deposit is charged to the landlord, the landlord retains control of the account when the deposit is held on trust for the tenant.

If the tenant becomes insolvent, the deposit does not form part of the tenant’s estate, therefore the landlord may be able to use the deposit to cover unpaid rent (subject to the terms of the deed).

Conversely, this deposit structure may be burdensome for landlords, as the landlord acts as a trustee and is therefore subject to trustee duties in law. Additionally, there are tax issues for the landlord to be aware of and specialist tax advice should be sought before entering into a rent deposit deed.

Checklist for landlords

A non-exhaustive list may include:

• Ensure that the deposit account has a sufficient amount of money to cover the liabilities that the deposit is intended to secure.

• If a landlord opts for a deposit charged to the landlord by the tenant, it should ensure that the tenant charges the deposit with full title guarantee, as this implies there are no other charges or rights over the deposit which could be exercised by another party.

• If a landlord opts for a deposit charged to the landlord by the tenant, the landlord should obtain an express warranty from the tenant that the deposit is free of any charge other than that granted to the landlord under the rent deposit deed. This will ensure that the landlord is the only secured creditor in relation to the deposit and will ensure that there are no competing claims to the deposit.

• If your tenant has breached one of the tenant covenants in the lease, firstly check the terms of the rent deposit deed to ensure you are able to withdraw the deposit to remedy the breach. If you are able to withdraw the deposit, check whether the deed states that you must give notice to the tenant before making the withdrawal.  

• If the tenant has breached the tenant covenant not to pay rent, before drawing down on a rent deposit, a landlord must consider its other options available in the case of unpaid rent. The lease may make provision for the landlord to forfeit the lease in the case of unpaid rent. If a landlord is considering forfeiture, it should be cautious about drawing down on the rent deposit as doing so may waive the right to forfeit.

Please do not hesitate to get in touch with Isabella if you are granting a new lease or your tenant is assigning an existing lease and you would like to discuss whether a rent deposit deed may be suitable.

Additionally, Isabella is able to assist with any landlord and tenant disputes where drawing down on an existing rent deposit may be a sensible course of action in the case of non-payment of rent or any other breaches of a tenant covenant in your lease.

Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.