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Increasing Demands from Landlords for Greater Protections: Rent Deposits and Personal Guarantees in Commercial Leases

Increasing Demands from Landlords for Greater Protections Rent Deposits and Personal Guarantees in Commercial Leases

As a result of the current economic and commercial landscape in Scotland, and the UK as a whole, commercial landlords are beginning to demonstrate a growing appetite for strengthened protections when entering into new commercial leases.

In order to protect their investments during a time of economic uncertainty, landlords are seeking additional protections and moving towards a ‘belts and braces’ approach in this regard.  

In particular, landlords are now more frequently seeking both rental deposits (often equivalent to between three and six months’ rent) and personal guarantees from directors or other appropriate persons if the tenant is an incorporated body. It is fairly routine practice for landlords to request rent deposits from their tenants at the outset of a lease, however, previously personal guarantees were usually required in limited circumstances. Commercial landlords would commonly request personal guarantees from new tenants where they felt that it was necessary to have additional security to ensure that the lease obligations would be fully complied with. For example, landlords would frequently seek personal guarantees in instances where the tenant was a new company which did not have a lengthy track record of trading on which to rely upon.  However, now there is a growing trend appearing where landlords are seeking both rent deposits and personal guarantees from their new commercial tenants in a wider variety of circumstances.

As landlords across the board begin to demand stronger protections, and the scope for negotiation in this regard as a commercial tenant is somewhat limited, it is imperative that all commercial tenants are aware of the implications.

Rent Deposits:

A rent deposit is a sum of money which is payable by a tenant to their landlord at the outset of a commercial lease. Essentially, this deposit serves as a form of security for the landlord in the event that the tenant fails to pay the rent or breaches certain other obligations under the lease. The understanding is that if the tenant complies with all of their obligations, then the rent deposit will be refundable at the end of the lease term. However, it stands to protect the landlord from any potential financial losses caused by a tenant’s breach of the lease provisions. Having this immediate access to a sum of money is advantageous to landlords as it eliminates the need to raise legal proceedings in order to recover any unpaid rent. Formerly, rent deposits were also seen to be beneficial for tenants as they prevented the need for alternative forms of security such as personal guarantees.

Personal Guarantees:

In the context of a commercial lease, a personal guarantee is a legally binding agreement between a landlord and a guarantor (usually an individual business owner or director of the tenant company) which states that should the tenant fail to fulfil their obligations under the lease, then the guarantor will be personally liable. Therefore, if the tenant company were to default in their rental payments or become insolvent, the guarantor would become personally liable for paying the rent and for fulfilling the tenant’s obligations under the lease. The financial consequences of this personal liability can be extensive and severe. If the guarantor is unable to fulfil the obligations or make payment of the rent themselves, then they risk losing their own personal assets and they could even be forced into personal bankruptcy.

If you have been impacted by this article, our expert team of Commercial Property specialists is ready to assist you. Whether you are looking to buy or lease commercial property in Scotland or have other commercial property-related needs, our dedicated team is here to help. Contact our Commercial Property team today at 0141 221 1919 to take the first step. We take the time to understand your unique situation, address your concerns, and provide tailored solutions that make a real difference. Wherever possible, we will remove the complexity; explain everything in easy-to-understand language, make sure you are always comfortable, and keep you fully informed every step of the way.

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