Security Deposits in Commercial Leases

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What Is a Security Deposit?

A security deposit is money held by the landlord that he or she can use if the tenant incurs damages to the property either physically or by not fulfilling the terms of the lease.

What Is a Commercial Lease?

A commercial lease is a contract between a landlord and a business (tenant), describing the property to be rented and all rules pertaining to the rental. Rules may include the use of the parking lot, whether the tenant must pay property taxes, and what type of insurance will be paid (such as premises liability insurance) and by whom. 

Special Rules for Commercial Leases

Unlike residential tenant law, commercial tenant law allows parties the freedom to negotiate any and all rules in the contract. So, there is generally no statutory limit on the amount of security deposit that the landlord can demand. 

In a recent California Supreme Court case, a Silicon Valley dot-com start-up agreed to pay a huge security deposit to the landlord. The security deposit was one month’s rent in cash, plus an extra 18 months’ rent as a letter of credit. According to the California Civil Code, a commercial security deposit can be used for payment of rent, and to repair and clean the premises, but must be returned 30 days after the landlord regains possession.

The company could not pay their rent in 2001, and subsequently went belly up. The landlord drew on the letter of credit for 4 months’ of unpaid rent, and then started eviction proceedings, thinking that it could retain the remaining letter of credit funds for the payment of future rent. The Court ruled that because the landlord filed an eviction, and because the language of the contract mirrored the Civil Code language, the landlord must pay back the remaining letter of credit funds 30 days after the eviction. 

If the landlord had done nothing, it could have continued to draw off the letter of credit. Alternatively, the landlord could have drafted a "waiver" into the lease, waiving the Civil Code section. The moral of the story is that in a commercial lease, the parties have the choice to contract out of any statute or law governing leases. 

Who Can I Get to Help Me Negotiate Terms in a Commercial Lease?

You will probably want to consult a real estate attorney who has experience with commercial leases. Your attorney will be able to help you understand in plain terms what each term in the contract means, and can help ensure that your interests as a tenant will be properly represented in the lease agreement.

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Last Modified: 11-12-2013 04:57 PM PST

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