Security Deposits in Commercial Real Estate: An Investor’s Guide

Much like with residential leases, investors in commercial properties may require tenants to pay a security deposit before entering into the lease agreement. Security deposits, whether in commercial or residential settings, are used to protect the landlord from incurring a loss in the event the tenant does not pay the rent, breaches the lease agreement, or damages the property.

In short, the purpose of the security deposit is to secure the lease obligation. While security deposits can be requested in both the residential and commercial worlds, when it comes to commercial-lease landlords, there are no uniform provisions. State law does not place a restriction or cap on how much the landlord can charge for the security deposit.

In general, the law recognizes those who interact in the commercial real estate world to be sophisticated actors and, thereby, able to negotiate the terms of the security deposit, absent an existing statute. This gives the landlord free range when setting the security deposit.

Include A Clause In The Lease Agreement

While there is no standing state law, landlords should include the negotiated terms of the security deposit in the lease agreement. The type of language included in a commercial lease agreement is important. When drafting the lease provision, the landlord should include language dictating when and how the security deposit will be used, refunded, and retained.

When drafting the lease, landlords may also want to consult an attorney to ensure it’s airtight. The landlord may also want to consult with an attorney concerning how the funds should be handled. In some circumstances, the landlord is required to hold funds in interest-bearing accounts.

For this reason, the landlord should not only include within the lease the account in which the security deposit will be held but also consult with an attorney when drafting this provision.

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