Contributed By McGuireWoods LLP
The most common form of security in a commercial lease is a cash security deposit. The amount of the deposit is negotiable and will depend on the credit of the tenant, the length and nature of the lease, the amount (if any) invested by the landlord in the space, and other factors. Deposits equal to one or two months of rent are common, although for large, credit tenants it is common for the deposit to be waived altogether. Landlords under commercial leases are typically permitted to comingle the deposit with other funds, and are not required to hold the deposit in a separate account. Deposits typically do not accrue interest. When a landlord is required to utilize any portion of a deposit, the tenant is often required to immediately restore the deposit to its full amount.
Security deposits may also be in the form of a letter of credit. Landlords typically require approval of the issuing bank and the form of the letter of credit, which can be heavily negotiated. In some cases, the parties may negotiate for the letter of credit to be reduced or returned to the tenant upon certain occasions (eg, the passage of time without a default, etc). Alternatively, the tenant may have the right to convert the deposit to cash.
Another form of security is a parent guaranty or personal guaranty, often issued by a parent company of the tenant, or a personal stakeholder in the tenant.
Finally, although less frequently required, some landlords may require additional security in the form of a lien on the tenant’s fixtures, furnishings, equipment and other personal property, which may be perfected by the filing of a UCC-1 financing statement. Also, landlords sometimes reserve the right to require additional or separate security in specific instances (for example, the posting of a bond or additional security before permitting a material alteration).