As with a residential lease, commercial properties carry a similar set of contractual agreements.
A key component of the agreement on a commercial lease is the deposit.
Here’s what to know about commercial deposits before signing a rental agreement.
Understanding Deposits
Commercial property deposits are higher than residential property deposits.
A deposit is a predetermined sum of money which a tenant is required to pay the landlord before taking occupation of any commercial premises.
This deposit serves as security during the period of the lease, and is kept in the event that the tenant defaults on the rent, fails to pay an operating service or municipal account, or causes damage to the property.
How the deposit is determined
The deposit amount is usually based upon the monthly rental for the property, and can amount to one, or several month’s rent.
However, the final amount will ultimately be agreed upon by the tenant and the landlord.
In most lease agreements a rental increase occurs after the first 12 months of the lease period.
This means that once the escalation of the monthly rental amount has taken place, the deposit will need to be topped up by the tenant to ensure that a full deposit is held in reserve.
Tip: It is important that this top up is agreed to by the tenant and clearly stipulated in the lease agreement.
Specified deposits
The current industry norm is that the tenant pays a single undefined deposit amount to be used for three particular scenarios: defaulting on the rent, failure to pay an operating service or municipal account, or causing damage to the property.
That said, best business practice would suggest defining three separate, specified deposits provided: one for rental, one for damages and one for services.
This would prevent the landlord from using the whole deposit on one of the three possible payment defaults.
In the event that the landlord needs to utilise a portion of one of the deposits, the tenant would need to replace the amount, ensuring that a full deposit is available at all times for any future default or repair.
Another reason to distinguish between the deposits is because different deposits may take different amounts of time to be reimbursed at the end of the lease.
It would be necessary to include a clause in the lease contract outlining the three separate deposits as well as their specific purposes.
Interest on the deposit
The commercial and residential rental markets are distinctly different in the way in which they deal with interest accrued on a tenant’s deposit.
In the residential market, a landlord is obligated by law to place the deposit received from the tenant into an interest-bearing trust account.
At the end of the agreement the landlord must return the deposit as well as the accrued interest to the tenant, provided there was no damage to the property.
In the commercial rental market, the landlord is required to keep the deposit in a trust account, but there is no legal requirement to reimburse the interest which was accrued on the deposit.
Though this is common, it is recommended best practice that provision be made in the lease for the return of both the deposit and the interest thereon.
Return of the deposit
The timeline for the return of the deposit must be defined in the lease agreement.
A carefully constructed lease agreement is essential to both the landlord and the tenant.
Both parties must fully understand every part of the agreement, including specific clauses such as those referring to rental or deposits to minimise the chance of misunderstandings occurring at the end of the lease.
A factor which could impact upon when the deposit will be returned is whether the property is in a satisfactory condition at the end of the lease.
If part of the deposit is needed to restore the property to its original condition, due to damages, or if services or municipal accounts have not been paid by the tenant, some or all of the deposit will need to be utilised to settle these costs.
Once the property is assessed and any claims made against the deposit are finalised, the remainder of the deposit will be returned to the tenant.
In the final month of the lease agreement the tenant may not decline to pay the monthly rental as a means of recouping his deposit.
Rawson Commercial currently has offices countrywide and will gladly assist you in renting out your commercial property. Please contact (021) 658 7100 and we will refer you to your nearest office.
