A security deposit is typically an amount equivalent to one to three months’ rent. This is deposited by the tenant to secure, as far as money can, the performance of their obligations under the lease.
Under the retail leases act, a landlord is required to lodge this security deposit to the Office of Fair Trading as a retail bond.
However, under a commercial lease, a landlord generally is at liberty to deal with the security amount as they see fit so long as it is repaid in part or in full at the end of the tenancy.
Another form of security often used is a bank guarantee. This document is produced by a financial institution. It nominates the lessor and the sum that the bank guarantees to pay at any time when the landlord calls up the same. It is not unusual for these documents to have an expiry date so it is crucial to ensure these are updated prior to expiry, or when new leases are issued to existing tenants, and should be held in a safe place.
Rule of thumb – lease conditions pertaining to security deposits should read, for example, 3 months’ rent including GST and outgoings as defined under the lease on a pro-rata basis.
This will allow the landlord the opportunity to vary the security amount as the rent increases over time in lieu of stipulating a fixed sum amount.
The security deposit amount should reflect the risk of potential default and the lessee’s asset backing, experience and any previous rental history or creditor references disclosed. This can vary from one month to six months.
Security deposits are usually in addition to any personal guarantees nominated in a lease.
