Negotiating Security Deposit Terms in a Commercial Lease

January 28, 2014

Almost all commercial leases, like their residential counterparts, will contain a provision regarding a security deposit. While the law contains much fewer specific restrictions on commercial security deposits than it does residential ones, there are several practices that can help you successfully a workable deposit in your next lease.

Residential lease terms, including security deposits, are closely governed by laws because the law considers residential landlords inherently stronger, from a commercial perspective, than their tenants. Because the law sees commercial tenants and landlords as equally strong, no such restrictions exist. Whether you are a landlord with a property in a prime location, or a tenant seeking space in a region with high vacancy rates, you are generally free to use all of your bargaining power in negotiating your lease.

In a 2005 California case pertaining to a landlord’s eviction of its dot-com client, the evidence revealed that the parties had agreed that the tenant would pay, in cash, the equivalent of one month’s rent. The tenant also contracted to sign a letter of credit in an amount equaling 18 months of rent. Here in New Jersey, landlords in many areas are struggling with unoccupied space, so they might not have such steep demands, but this example highlights the legal standard, in both states, that a security deposit may be whatever an individual commercial landlord and tenant agree upon when they negotiate the lease.

One element that may help bring a landlord and a tenant together on the issue of a deposit is a letter of credit. Letters of credit are documents from banks guaranteeing tenants’ timely payment of rent. A letter of credit may allow a tenant to obtain a space it might not otherwise be able to land, and allow it to preserve precious cash for use in its business. A landlord may also value a letter of credit, as it ensures that it will get paid, even if the tenant’s business collapses and fails. Even if the tenant business declares bankruptcy, the landlord may still collect under a letter of credit, if the letter is properly drafted.

Parties should also be sure to specify exact terms regarding the elements surrounding the return of a security deposit. As a landlord, you may wish to require your tenant to remove all of its possessions from your property and pass an inspection before the lease places you under any obligation to return the deposit. As a tenant, you may wish to require that your landlord return your deposit on a timely basis, and specify what constitutes “timely”.

Many vital decisions and calculations go into negotiating a commercial lease, but a security deposit is a factor in almost all leases. For in-depth and thoughtful advice and assistance on negotiating a security deposit term in your commercial lease, reach out to the real estate attorneys at Samuel C. Berger, P.C. Our New Jersey real estate attorneys are very experienced in these issues and can help you work out a deposit that makes business sense for you. Reach us online or call (201) 587-1500 or (212) 380-8117.

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