Negotiating Heads of Terms for a Commercial Property Lease: Rent Deposit or Guarantor?
From the Point of View of a Prospective Tenant
If you run your business through a limited company which has no business track record and history of renting commercial property the landlord may want a guarantor.
A guarantor could be a director of the company or, if you are an individual with no business track record and no personal assets, the landlord might want a guarantee from someone else such as a family member. But beware of guaranteeing a business lease: not only must the guarantor pay the rent if you fail to make payment but the guarantor might also be required to take over the lease. You should avoid personal guarantees.
If the landlord insists on some form of security it might be better to agree to pay a rent deposit. This is a deposited sum of money which the landlord can draw against in the event you fail to pay rent or other payments due under the terms of the lease.
Typically, a landlord will be looking for a deposit which equates to 6 – 12 months rent or the amount of time the landlord considers it would take find another tenant if you failed to pay the rent. It is up to you, and the strength of your bargaining position, as to whether you negotiate a lesser rent deposit and also to limit it in time for example, 3 months deposit held by the landlord for 1 year. This gives the landlord some cover in the event you do not pay the rent during what might be the riskiest period of the tenancy namely when you are trying to establish the business at the premises.
If a deposit is taken then, provided the landlord does not have any claim on it (because for example you do not pay the rent and do not meet your repairing obligations) it will be returned to you when the lease expires or is lawfully assigned or sub let.
Interest on the deposit would normally accrue to you, the tenant.
You should ensure the deposit is ring fenced to protect against insolvency of the landlord. There are a number of ways to achieve this and you should get legal advice before agreeing basic lease terms and signing off a heads of terms agreement: Call now to speak to a commercial property solicitor and receive free initial, no obligation advice on this important negotiation point before heads of terms are agreed.
To follow later this week: Part 2, Rent Deposit or Guarantor?
From the Point of View of a Commercial Property Landlord