Getting Your Security Deposit Back When Renting Commercial Space

When your commercial lease comes to an end, either by its own terms or by early termination, you'll be entitled to the return of the deposit, less any sums that the landlord has properly withheld. Many leases don't clearly spell out how and when the landlord will return the money to you. But (as with all lease clauses), you might be able to negotiate the timing and procedures for the return of your deposit.

Make sure you know what terms you should negotiate for in your commercial lease and your rights to get your security deposit back.

What Is a Security Deposit?

A "security deposit," as its name suggests, is a deposit the tenant gives to the landlord to provide the landlord with some financial security in case the tenant breaks the commercial lease. The landlord doesn't want to risk dipping into their own funds to cure (fix) a deficiency caused by the tenant.

Almost all landlords will demand tenants to provide a security deposit upfront to secure a lease. (Though some will accept a letter of credit in lieu of a security deposit.) In comparison, your residential landlord might've asked you to provide one or two months' rent as a security deposit for your apartment. A commercial landlord is no different.

How Much Is a Security Deposit?

The amount of a commercial real estate security deposit can vary widely. Unlike security deposits in residential leases, deposits in commercial leases aren't limited by state law. States typically don't have caps on what a commercial landlord can require for a security deposit.

Typically, the amount depends on several factors such as:

• the tenant's credit history
• how long the tenant has been in business for
• the tenant's proposed business activities
• the tenant's financial health
• the market and demand for commercial space
• the length of the lease, and
• the strength of the other terms of the lease.

For example, suppose you're a new business with little credit history and not as many financial records to show. The landlord will likely demand a higher security deposit from you than from an older, established business with years of profitable statements. Or, if the landlord has a lot of vacant spaces and you're offering to sign a long-term lease, you can probably negotiate for a lower security deposit.

What Is a Security Deposit Used for?

In theory (but not always in practice), a security deposit is typically used when:

• the tenant is late or doesn't pay rent
• the property is damaged (typically beyond general wear and tear)
• the property must be altered back to its original condition (for example, removing shelves or wallpaper the tenant installed)
• the property must be cleaned beyond normal cleaning procedures (such as removing a particularly difficult stain or employing a heavy-duty cleaning crew to clean months of neglect), or
• the tenant breaks another term of the lease.

But without the proper protection in your lease, a security deposit's general purpose can come with plenty of caveats. For example, can the landlord take from your deposit if you're just one day late on rent and haven't missed a payment before? Does the landlord need to give you a chance to fix whatever the problem is (late payment or property damage) before they take it out of your deposit? Can the landlord still take money when you dispute the debt?

Security Deposit Clause in Your Lease

Typically, this part of your lease is relatively vague and can often be overlooked. As long as it says that the landlord has to return the security deposit owed at the end of the lease, you might think you're in the clear. But it's wise to give this clause more consideration.

Typically, the landlord prepares the lease and presents it to the tenant. A shorter, vague clause usually serves the landlord. So you'll likely have to bargain for more detailed terms to maximize the protections for your security deposit.

Below, we cover different details to keep in mind when negotiating the security deposit portion of your lease. If you're already bound to a commercial lease, then pay attention to these terms. If you're able to renegotiate down the line and have concerns about how the landlord will treat your security deposit, you should prioritize these deposit terms.

How the Landlord Can Use Your Security Deposit

As mentioned before, the security deposit clause is usually pretty vague. It will likely mention that the landlord can deduct any amount from the security deposit to cover any money owed to the landlord and to put the premises in good condition. You (and others) might interpret this general phrasing as applying to any due rent and utilities as well as any repairs beyond what the landlord would reasonably expect from the occupation.

But a crafty landlord can stretch that clause to cover costs you might not think of like disputed fees. For instance, suppose you disagree with the landlord about a quote they received regarding some repairs to the property. You seek out your own quotes and consistently get quoted half the price by reputable companies. But the landlord wants to use the original company because of a personal interest. If there's no clear dispute resolution for this kind of issue outlined in your lease, then the landlord could just take the quote for the larger fee out of your security deposit and move on. You'll want to try to avoid this scenario for yourself.

When the Landlord Must Return Your Security Deposit

You'll rarely see a landlord's lease clause that imposes a time requirement for the return of the deposit. Usually, there's no mention of it or the landlord will allow themselves a "reasonable time" to return the deposit, whatever that is.

Most states are silent on this topic. But a few states have laws that provide timetables for when a landlord must return the tenant's security deposit. Typically, these laws say that the landlord has a specific number of days—typically ranging from 21 to 60 days—to return the deposit from the date that either

• the lease ends
• the tenant leaves the premises, or
• the tenant provides the landlord with delivery instructions.

You should check your state's laws for specific requirements.

Because few states have requirements for when to return security deposits, you should make sure to cover this issue in your commercial lease. You could propose a term of two weeks from the end of your lease. Leave some room for negotiating. It might be worth agreeing to give the landlord a month if the concession earns you favorable terms elsewhere in the lease.

Tenant Obligations for the Return of the Deposit

Before returning the deposit, your landlord will probably require you to remove your personal property and move out. They'll probably also want to inspect the premises to make sure the property is in its original condition (prior to any improvements or alterations you made). In addition, the landlord might insist that all rent and other monies owed be calculated and paid.

These conditions are reasonable and, in turn, enable you to raise some of your own—specifically, the timely return of your deposit. But the whole process shouldn't take an extended period of time unless there are extenuating circumstances.

You'll want to fulfill all of the obligations under your lease to get your security deposit back. You don't want to give the landlord any reason to withhold the deposit. Follow these tips to make sure you're holding up your end of the lease agreement:

• Pay your rent on time and keep a record of your rent payments.
• Make sure any repairs, improvements, or alterations you make to your space are approved by your landlord and follow the terms of your lease.
• If your lease specifies that the premises be returned in its original condition, remove anything that would violate this term. If you need to repaint a wall or remove lighting, you should do so unless you and the landlord agree otherwise in writing.
• Schedule a walkthrough of the premises with your landlord before your lease ends where you walk the property together and go over any work that needs to be done to get the property back into good condition. If the landlord indicates that a knick in the wall will result in a deduction of your security deposit, make sure you can fix it before the landlord's final inspection. Ask the landlord to put these deductions in writing. If you can and do make the appropriate repairs, have the landlord sign off on it in writing and remove the deduction.
• Take pictures or videos of the premises before and after your tenancy. Make sure these pictures can be dated so you can use them to back up your claims, if necessary.
• Make sure you provide the proper notice to your landlord when you end the lease (if you terminate early).

Getting Your Deposit Back Early

While you typically won't see your deposit until the end of the tenancy, you might be able to negotiate an early return of the deposit if you establish yourself as a responsible tenant. Bargain for the right to get your deposit back early—known as a "burn down"—if you've steadily met your rent obligations over a certain period of time. Or, establish a set of financial mileposts (such as a minimum level of debt) that will trigger a gradual reduction and return of the deposit.

Where the Landlord Must Keep Your Security Deposit

The question of where your landlord should or must keep your security deposit has multiple purposes. If your state's laws don't address this question (which many don't), then you should seriously consider resolving it in your lease.

Specifically, you'll want to draft terms that specify the following:

• Whether your deposit must be kept in a bank. You'll want to have your security deposit placed in a federally insured bank. Oftentimes, this step will already be integrated into the landlord's practice and you can likely get the landlord to agree to this term.
• If your deposit is kept in an interest-bearing account, who's entitled to that interest. This term will likely be the most difficult one to get the landlord to agree to because it's free money for the landlord. If pushed, the landlord will likely argue that it's the cost of doing business or that it reasonably covers their efforts to maintain your security deposit account. Keep in mind, the security deposit legally belongs to you and the landlord is holding it in trust in case they need it. So it should reasonably follow that any interest that money earns is rightfully yours as well. But you'll have no laws on your side, so the landlord is under no obligation to give you the interest unless your lease says so.
• Whether your deposit can be mixed in with the landlord's other funds. Some states prohibit landlords from comingling security deposits with other funds. If your state law says so, then your job is much easier. You'll still want to add a provision that the landlord will abide by state law and keep your deposit in a separate account. If you're in one of the many states that don't have this protection, you'll want to negotiate for it. Keeping your funds separate prevents the landlord from using your money for other purposes (like to fund other business expenses). While the landlord can't ask you to cover unrelated costs, comingling your funds can make it longer for the landlord to come up with your security deposit. If your money is kept in its own account then it should be no problem to write you a check for the amount you're owed when your lease ends and all conditions for the return of the security deposit are met.

Prepare for the landlord to be resistant to all of these terms, particularly the last two. If your state doesn't offer commercial tenants any protections, your bargaining prowess will have to do the heavy lifting here.

What Happens to Your Deposit If the Landlord Sells the Building?

If the ownership of your rental property changes hands, the new owner will be bound by the terms and conditions of your lease. To protect yourself, make sure your lease states that any successor is deemed to have received your deposit and will bear the burden of returning it to you at the end of your tenancy. This item shouldn't be a sticking point for the landlord, and it's worth having it spelled out explicitly.

What Happens If the Landlord Doesn't Return Your Security Deposit?

If the landlord doesn't return the security deposit you're rightfully owed, then you can take legal steps to recover that money. If the landlord doesn't respond to your informal communications (such as emails asking for the security deposit), then you should take a more rigid approach.

Send Your Commercial Landlord a Demand Letter

The letter should include basic and relevant information about the issue at hand. Make sure you lay out all of the appropriate dates such as:

• the last date of the lease term
• the date you left the premises and removed all personal belongings
• the date of the final inspection
• the date when the landlord was required to return the deposit (if there's an agreed-upon deadline)
• the date of any communications where you ask for the deposit back, and
• the date you're writing the letter.

You should also restate any terms from your lease that are relevant. For instance, if your lease says that the landlord is required to return your security deposit within 21 days of when you vacate the premises, reference this language in your demand letter. Explain how you've met your obligations under the lease and specify the ways in which the landlord hasn't.

Give the landlord a deadline to reply to the demand letter. If the landlord doesn't meet that deadline, let them know you'll take further legal action, like filing a lawsuit.

You can send a demand letter yourself. But the letter might have more of an effect on the landlord if you have an attorney send one for you. The attorney might also be able to include relevant court cases in the letter to support your claim.

File a Lawsuit in Small Claims Court

If a demand letter isn't successful, then you can file your case in small claims court. Every state has a limit for the amount the court can award in small claims court. So you'll want to check your state's maximum dollar amount before you file in this particular court. If you put down $15,000 for your security deposit but your small claims court can only award $5,000, then you might be better off filing in district court.

You can file with or without an attorney. But it's always better to have a legal expert on your side when you go to court.

After you file your complaint, the landlord might try to reach out to you to resolve the matter and avoid court costs. You're not obligated to negotiate with the landlord at this point but it's often a good idea to take a shot at it. The landlord is much more motivated to resolve the matter and avoiding a court appearance could save you money as well.