In the Spotlight: Eight Ways Tenants Can Rewrite a Landlord's Security Deposit Clause

Landlords commonly require tenants to pay a security deposit at the beginning of the lease term. This payment is expected to be made in addition to monthly rent payments. A security deposit protects a landlord in the event a tenant is in default under its lease. It can cover non-payment of rent or any other damages caused by a tenant's noncompliance with leasehold obligations. There are at least eight revisions that a tenant can make to a landlord's “standard” security deposit clause that can protect its interests as well.

Model Language

Security Deposit. Tenant shall deposit with Landlord on or before the Commencement Date, the Security Deposit set forth in the Summary Sheet, if any, as security for the performance of Tenant's obligations under this Lease, including without limitation, the surrender of possession of the Premises to Landlord as herein provided. The Security Deposit shall (without notice or demand) automatically increase throughout the Term on each date that the Base Rent increases to provide Landlord at all times with a Security Deposit equal to ___ (__) months of the then Base Rent amount. If Landlord applies any part of the Security Deposit, including any Security Deposit not directly deposited with Landlord but transferred to Landlord in connection with the purchase of the Building, to cure any default of Tenant, Tenant shall on demand deposit with Landlord the amount so applied so that Landlord shall have the full Security Deposit on hand at all times during the Term. Landlord, in the event that the Premises are sold, shall transfer and deliver the Security Deposit, as such, to the purchaser of the Premises and shall notify Tenant thereof, and thereupon Landlord shall be discharged from any further liability in reference thereto. Tenant shall not be entitled to any interest on the Security Deposit and Landlord shall have the right to commingle the Security Deposit with its other funds.

Savvy tenants know that landlords will accept certain revisions to this “standard” clause. Most tenants also understand that “if they don't ask for it, they won't get it.”

1. Require Waiver of Security Deposit

Many tenants have sufficient bargaining power to insist that a security deposit is not necessary. Landlords can argue, however, that in this environment where even large institutions are vulnerable, it is not unreasonable for it to require a security deposit, even from large tenants.

2. Insist on Repayment if Tenant Complies with the Lease for a Specified Period

Tenants can agree to pay a security deposit with the proviso that, if it is not in default after the lease is in effect for a certain period of time, all or a portion of the security deposit will be returned to them. Sometimes this is acceptable to landlords who are initially unsure whether a particular tenant will be able to comply with the terms of the lease.

3. Apply Security Deposit to Last Month's Rent

So long as there are no defaults on the lease termination date beyond applicable cure dates, a tenant can ask that the security deposit be applied as payment in lieu of its last month's rent payment obligation. Landlords are reluctant to agree to such a revision because it leaves them unprotected in the event a tenant fails to surrender their premises in the agreed-upon manner.

4. Permit a Letter of Credit To Be Used Instead

A tenant would rather not tie up its money in a cash security deposit if it has the option of giving a landlord a letter of credit in its place. Landlords should be wary of such provisions and make sure that the letter of credit is irrevocable, payable upon presentation of a sight draft, has an automatically renewable term (if its term is less than the lease term), with all fees payable by the tenant, and is issued by a reasonably acceptable bank.

5. Require Interest to Be Paid to Tenant

This is a common battle ground for landlords and tenants. Many tenants inform landlords that, although the security deposit is being held as “insurance” to make sure that it complies with the lease, since the deposit is “their money,” if they are not in default at the end of the term, they should be entitled to whatever interest is earned on that money. Landlords may argue that, because they have so many leases, it would be administratively burdensome to figure out how much interest is owed at the end of a lease for each tenant. Landlords also claim it could lead to litigation if they fail to deposit the money into an account that yields a high enough interest rate and may seek to be absolved from liability not only for interest earned but also for loss of all or any portion of the security deposit by reason of the insolvency of the bank in which the security deposit was deposited.

6. Make Landlord PlaceSecurity Deposit into a Separate Account

Especially if the tenant is successful in convincing a landlord to pay interest on the security deposit money given to it, this may be the easiest way to keep track of interest earned on account of that deposit. Again, many landlords will argue that since they have so many tenants, it would be too much of an administrative headache to maintain separate accounts for each tenant.

7. Keep Security Deposit at a Level Rate

There is no magical reason that the security deposit should be set at any particular rate. If the security deposit is large enough, a tenant can state that there is no need to increase the amount as the rent increases and claim that it would be administratively burdensome for it to keep track of the dates when the increased amounts should be sent.

8. Prompt Repayment Should Be Mandatory

The model provision does not make any mention of when the security deposit will be returned to a tenant after the lease expires. A landlord should be required to determine promptly what, if any, money is needed to pay for tenant damages and deduct that amount from the security deposit. It should then return the balance by a certain date. Typically, parties agree that security deposits should be returned within 30 days after the lease expiration date.

Mark Morfopoulos, a member of this newsletter's Board of Editors, is with Aboyoun & Heller, L.L.C.

Landlords commonly require tenants to pay a security deposit at the beginning of the lease term. This payment is expected to be made in addition to monthly rent payments. A security deposit protects a landlord in the event a tenant is in default under its lease. It can cover non-payment of rent or any other damages caused by a tenant's noncompliance with leasehold obligations. There are at least eight revisions that a tenant can make to a landlord's “standard” security deposit clause that can protect its interests as well.

Model Language

Security Deposit. Tenant shall deposit with Landlord on or before the Commencement Date, the Security Deposit set forth in the Summary Sheet, if any, as security for the performance of Tenant's obligations under this Lease, including without limitation, the surrender of possession of the Premises to Landlord as herein provided. The Security Deposit shall (without notice or demand) automatically increase throughout the Term on each date that the Base Rent increases to provide Landlord at all times with a Security Deposit equal to ___ (__) months of the then Base Rent amount. If Landlord applies any part of the Security Deposit, including any Security Deposit not directly deposited with Landlord but transferred to Landlord in connection with the purchase of the Building, to cure any default of Tenant, Tenant shall on demand deposit with Landlord the amount so applied so that Landlord shall have the full Security Deposit on hand at all times during the Term. Landlord, in the event that the Premises are sold, shall transfer and deliver the Security Deposit, as such, to the purchaser of the Premises and shall notify Tenant thereof, and thereupon Landlord shall be discharged from any further liability in reference thereto. Tenant shall not be entitled to any interest on the Security Deposit and Landlord shall have the right to commingle the Security Deposit with its other funds.

Savvy tenants know that landlords will accept certain revisions to this “standard” clause. Most tenants also understand that “if they don't ask for it, they won't get it.”

1. Require Waiver of Security Deposit

Many tenants have sufficient bargaining power to insist that a security deposit is not necessary. Landlords can argue, however, that in this environment where even large institutions are vulnerable, it is not unreasonable for it to require a security deposit, even from large tenants.

2. Insist on Repayment if Tenant Complies with the Lease for a Specified Period

Tenants can agree to pay a security deposit with the proviso that, if it is not in default after the lease is in effect for a certain period of time, all or a portion of the security deposit will be returned to them. Sometimes this is acceptable to landlords who are initially unsure whether a particular tenant will be able to comply with the terms of the lease.

3. Apply Security Deposit to Last Month's Rent

So long as there are no defaults on the lease termination date beyond applicable cure dates, a tenant can ask that the security deposit be applied as payment in lieu of its last month's rent payment obligation. Landlords are reluctant to agree to such a revision because it leaves them unprotected in the event a tenant fails to surrender their premises in the agreed-upon manner.

4. Permit a Letter of Credit To Be Used Instead

A tenant would rather not tie up its money in a cash security deposit if it has the option of giving a landlord a letter of credit in its place. Landlords should be wary of such provisions and make sure that the letter of credit is irrevocable, payable upon presentation of a sight draft, has an automatically renewable term (if its term is less than the lease term), with all fees payable by the tenant, and is issued by a reasonably acceptable bank.

5. Require Interest to Be Paid to Tenant

This is a common battle ground for landlords and tenants. Many tenants inform landlords that, although the security deposit is being held as “insurance” to make sure that it complies with the lease, since the deposit is “their money,” if they are not in default at the end of the term, they should be entitled to whatever interest is earned on that money. Landlords may argue that, because they have so many leases, it would be administratively burdensome to figure out how much interest is owed at the end of a lease for each tenant. Landlords also claim it could lead to litigation if they fail to deposit the money into an account that yields a high enough interest rate and may seek to be absolved from liability not only for interest earned but also for loss of all or any portion of the security deposit by reason of the insolvency of the bank in which the security deposit was deposited.

6. Make Landlord PlaceSecurity Deposit into a Separate Account

Especially if the tenant is successful in convincing a landlord to pay interest on the security deposit money given to it, this may be the easiest way to keep track of interest earned on account of that deposit. Again, many landlords will argue that since they have so many tenants, it would be too much of an administrative headache to maintain separate accounts for each tenant.

7. Keep Security Deposit at a Level Rate

There is no magical reason that the security deposit should be set at any particular rate. If the security deposit is large enough, a tenant can state that there is no need to increase the amount as the rent increases and claim that it would be administratively burdensome for it to keep track of the dates when the increased amounts should be sent.

8. Prompt Repayment Should Be Mandatory

The model provision does not make any mention of when the security deposit will be returned to a tenant after the lease expires. A landlord should be required to determine promptly what, if any, money is needed to pay for tenant damages and deduct that amount from the security deposit. It should then return the balance by a certain date. Typically, parties agree that security deposits should be returned within 30 days after the lease expiration date.

Mark Morfopoulos, a member of this newsletter's Board of Editors, is with Aboyoun & Heller, L.L.C.