Part 23*: How does the security deposit work on a commercial lease?

In most commercial leases, Tenants are required to deliver a security deposit to the Landlord. The amount of the security deposit is usually determined by the rent and the Tenant’s credit worthiness, and the security deposit increases as the rent increases throughout the term of the lease. On a retail lease, the security deposit may be three times the monthly rent. The security deposit secures the Tenant’s obligations under the lease. For example, if the Tenant is obligated to maintain the sidewalk and the Tenant fails to do so, theoretically the Landlord, after notice to the Tenant, could perform the repair and deduct the cost from the security deposit.

Most commercial leases will require the Tenant to replenish the security deposit if the Landlord needs to draw against it. Upon the expiration of the lease, the Landlord will be required to refund the balance of the security deposit to the Tenant within a specified time period. In some cases, the security deposit may be in the form of a Letter of Credit.

If a Tenant breaches the lease, the Tenant may be required to deliver additional security and if the Tenant “breaks” the lease early, the Tenant may forfeit the security deposit. As is the case with most lease provisions, the devil is in the details, and the details can mean the difference of thousands of dollars.

*Thank you for taking the time to read this article. This article is part of our “Commercial Leasing for Non-Lawyers,” a Blog Series on Commercial Leasing. Other aspects of commercial leasing transactions in New York are discussed in other Parts of this series.

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