Many landlords ask for security deposits when you sign a commercial lease, but did you know that these deposits aren’t always required by law? The good news is you can often negotiate them. Unfortunately, many business owners don’t realize this and end up paying a deposit without ever questioning the amount or terms. Your goal as a tenant is to pay as little as possible, or even better—no deposit at all! After all, deposit money doesn’t earn you any interest, and it’s far better used as working capital for your business.
Tenant vs. Landlord: The Security Deposit Dilemma
From a tenant’s point of view, paying a security deposit doesn’t provide any real benefits. It ties up your money that could otherwise be used to grow your business. Plus, landlords aren’t always quick to return it, especially if you don’t renew your lease.
From the landlord’s perspective, security deposits make sense. They provide a cushion to cover the costs of things like tenant turnover and repairs. Landlords may be trying to recoup costs, including:
- Vacancy periods: If the commercial space has been empty for a while, the landlord isn’t making any income.
- Tenant incentives: Landlords may offer incentives like free rent or tenant allowances to attract new tenants.
- Repairs and improvements: They may need to update the space before leasing it out again.
- Real estate commissions: Landlords often have to pay agents (typically around 5% of the total base rent), which can be a significant cost. Don’t worry—this isn’t your responsibility!
Document Everything
Regardless of the landlord’s approach to the security deposit, it’s important that everything is documented in your lease agreement. This record will detail how much of a deposit you’ve paid and ensure you have proof of it for future reference.
If the landlord sells the property, you may receive an estoppel certificate, which confirms the terms of your lease, including the security deposit. This document acts as verification for third parties and can be important down the line.
Why Do Landlords Hold the Deposit?
Landlords often hold onto the deposit for the full lease term to cover a variety of costs. If you cause damage to the space, fail to remove your improvements, or leave the place a mess, they might use the deposit to cover repairs. They could also deduct for any unpaid rent or outstanding fees like Common Area Maintenance (CAM) charges. It’s all about ensuring the landlord isn’t left covering costs from the tenant’s side.
While it’s commonly said that a security deposit protects the landlord if you default on the lease, in reality, the deposit often helps the landlord cover their initial expenses like commissions and tenant inducements.
It’s All in the Details
The deposit clause in your lease is where things can get tricky. Keeping it vague could lead to misunderstandings down the road. It’s important to cover every detail in the agreement, especially when it comes to the deposit. Here are some key questions to ask the landlord:
- How much is the deposit?
- How is the deposit applied?
- Is it fully refundable?
- When will it be returned?
- Under what circumstances would it not be returned?
While one to two months’ rent is the standard for commercial leases, deposit amounts can vary. Factors like your financial strength, personal guarantees, competing offers, and landlord incentives can all influence the amount you’ll be asked to pay.
Security deposits don’t have to be the headache they often seem to be. If you’re starting a business or negotiating a lease, keep these tips in mind. With a little negotiation and attention to detail, you can keep your deposit as low as possible or avoid it altogether.
If you arr unsure about the lease terms or need help negotiating, book a free meeting with a Business Link Strategist who can help guide you through the process.
Author: Jeff Granfield, The Lease Coach
Website: https://www.theleasecoach.com/
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