What is a rent deposit and how are they used?

A rent deposit is an upfront payment provided by a tenant to its landlord at the beginning of the tenancy agreement as a form of security to ensure that the tenant performs its obligations under the lease. This provides some protection for the landlord in the case that the tenant defaults on its regular rental payments or becomes insolvent.

Rent arrears

As this period of unchartered territory unfolds during the COVID-19 pandemic, many commercial tenants may be faced with cash flow difficulties as their business are forced to cease trading. In some circumstances, the tenants may cease to make rental payments.

The government has provided some protection for tenants from the risk of forfeiture until the end of June 2020 (this may be subject to change) in the Coronavirus Act 2020. This legislation will relieve a commercial tenant from facing fears of forfeiture of the lease for non-payment of the March 2020 quarter’s rent and any other rent payments falling due up to the 30th June. This legislation has been implemented to provide a net of protection to be used alongside conversations and voluntary arrangements between landlords and tenants. 

It should be highlighted, however, that the legislation does not intend to suspend or reduce any rent owed. It remains payable and interest may be accruing on any unpaid sums due to any contractual provisions within the lease should be carefully considered.

If a tenant is unable to make their rent payments, landlords may decide to draw on the funds held in the rent deposit to cover the rent arrears. This option may be helpful as an efficient method of recovering the debt whilst preserving the landlord and tenant relationship. It should be noted that a drawdown from a rent deposit by a landlord could be an act that amounts to the landlord waiving its alternative right to forfeit the lease or exercise a landlord break clause.

Drawing on the rent deposit is usually a temporary arrangement and tenants are liable to repay any sums withdrawn from the deposit. If a landlord is required to use the money from the rent deposit in order to cover a missed payment, tenants will normally be required to top up the deposit to the full amount.

If a tenant fails to pay the rent or make a rent deposit top up the landlord may look to seek payment from a former tenant or former guarantor who may have an ongoing liability to the landlord. Landlords need to be aware that demands for rent deposit top-ups are covered by Section 17 Landlord and Tenant Act 1995).

The statute allows for landlords to demand any sums due, including those under a rent deposit top-up request, subject to the landlord providing notice within 6 months of when any outstanding top-up payment is due. If the correct notices are not served then the former tenant (or guarantor) will be able to avoid liability for rent top-ups and arrears.

Landlords and tenants should check lease documents and Rent Deposit Deeds carefully to consider any other consequences that may arise through the use of the rent deposit monies.

Further information

Should you require any further information regarding how COVID-19 might impact the provisions in your lease you can contact a member of our dedicated real estate team on 01619414000 or at lawyers@myerson.co.uk

We also recommend paying close attention to any new government guidance at www.gov.uk and following our COVID-19 blog series.