What's your landlord doing with your rent deposit?
First things first - what is a rent deposit? In its simplest form a rent deposit should be a sum of money handed over by a tenant to a landlord at the start of a lease as security for payment of rent. Rent deposits for residential premises are now protected by regulations. A landlord must join a Tenancy Deposit Scheme and failure to comply with the regulations entitles the tenant to sue for compensation equal to three times the value of the rent deposit. For commercial premises there is no such protection, however. Frequently, landlords attempt to use rent deposits for a whole range of purposes. If you are worried about what your landlord might do with the depsoit once you have handed it over then you should ensure that the landlord's rights and obligations in respect of the rent deposit are documented either in the lease or a separate rent deposit deed. This is a fundamental first step. If there is nothing in writing dealing with the rent deposit then the landlord can put it straight into the bank and spend it.
What should be covered in a lease deposit deed?
Having established that the rules regarding the use of the rent deposit must be in writing, what things should be covered in the lease or rent deposit deed?
Who holds the deposit?
In an ideal world, the landlord should not hold the deposit. It should ideally be held in an account operated by the landlord's solicitor to ensure the funds are not misappropriated. If the landlord goes into administration or is declared bankrupt, suing for the return of the deposit will be a waste of time if the money has already been spent. It can be difficult to persuade a landlord to agree to this (usually because solicitors have no interest in managing a load of deposit accounts for their clients). At the very least, if the landlord is to hold the deposit it should be paid into a separate designated deposit account.
Who is entitled to interest on the deposit?
This should always be the tenant as it is the tenant's money. The lease or rent deposit deed should specify that the landlord should put the money into an account that pays interest and that the interest should be paid to the tenant (usually once every twelve months). The interest should not just be allowed to sit in the deposit account.
In what circumstances can the landlord withdraw money from the deposit account?
This needs to be very carefully specified. Landlord's solicitors will normally draft the documentation to allow the landlord to deduct money whenever the tenant breaches the lease to cover all losses and expenses incurred by the landlord as a result of the breach. Like indemnities, this gives the landlord a right to compensation and costs that the general law might not otherwise allow and is therefore intrinsically unfair. The landlord should only be allowed to withdraw money for non-payment of rent (and possibly interest on the unpaid rent if the lease provides for interest on late rental payments). The landlord should also not be entitled to withdraw money for non-payment of service charge as the reason for the non-payment may be a dispute over the amount of the service charge.
When should the deposit be repaid to the tenant?
The principle behind the rent deposit is that a landlord is entitled to ask for security where a tenant cannot demonstrate its ability to pay the rent (by producing accounts or references to demonstrate its financial position). That being the case, the tenant should be entitled to the return of the rent deposit if a point is reached during the term that enables it to demonstrate its financial strength. A common way of dealing with this in a rent deposit deed is to say that a tenant is entitled to the return of the deposit if it can produce three years accounts which show a net profit of three times the annual rent. The rent deposit should also be returned to the tenant if it sells the lease and also at the end of the term. Again, the landlord should not have the right to deduct from the deposit at the end of the term any amounts it sees fit to cover a potential dilapidations claim.
If you are concerned about your lease deposit or need any further advice on lease deposits contact Steve Petty on 01926 629005.
Article added: 11 August 2008 © Cousins Business Law
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