Rent Deposits and Guarantors for Business Tenants
What is a rent deposit?
Landlords often ask new business tenants for a rent deposit, usually expressed as a sum equivalent to 3 or 6 months’ rent. This money is held by the landlord in a designated account and can be drawn on if the tenant defaults in paying the rent or is otherwise in breach of covenant, causing the landlord expense. The arrangements are recorded in a formal rent deposit deed.
When should a rent deposit be taken?
A rent deposit would typically be required if the tenant’s trading history does not meet the landlord’s requirements. New or recently formed businesses often fall into this category. In the current climate, with many tenants experiencing financial difficulties and going into administration, a rent deposit can be extremely useful. It is usually easier for the landlord to draw on a rent deposit than to get money out of the administrators.
Return of the rent deposit
A rent deposit deed should provide for the deposit to be returned at the end of the term of the lease or when the tenant assigns the lease. It may also provide for the return of the deposit if the tenant passes a “profits test”. A typical profits test would be for the tenant to provide 3 years’ audited accounts showing a net profit of, say, 3 times the annual rent.
Guarantee covenants
An alternative to a rent deposit (or an additional source of security in some cases) is to have someone personally guarantee the payment of rent by the tenant, and the performance of the other lease covenants. The guarantor would usually be a director of the tenant company or it might be given by the tenant’s parent company. As with a rent deposit, a guarantee can be enforced if the tenant has financial difficulties.
Our template leases contain optional guarantor provisions and our licence to assign template provides optionally for a guarantor for the assignee. We also have freestanding guarantor agreements.
What happens to a guarantee if the lease is varied?
Landlords need to be aware that a guarantor may be automatically released from its guarantee if the lease is varied, unless the guarantor has consented to the variation. If the variation is not substantial and does not result in a greater liability for the guarantor, the guarantee will remain effective but the safest course of action is to involve the guarantor in all transactions relating to the lease.