Holding deposits for commercial leases
Is a holding deposit necessary for a commercial lease?
If you’re considering leasing a commercial property, the landlord or agent may ask you for a holding deposit. The agent or landlord may want something to show that you’re serious about the property, or perhaps even to take the property off the market.
A cash deposit is often used as a way to hold the premises for the potential tenant before a formal deal is reached. However, for commercial premises there is no law covering what the deal is or should be, what the deposit should be, or when a deposit should be refunded.
Both parties should be clear about what the holding deposit is for, including whether it’s refundable and under what circumstances. This may prevent a court or tribunal from having to make a decision for you. Without some kind of agreement between the parties, only a court or tribunal can make a ruling about the deposit.
Taking the property off the market
You might want the property taken off the market and held exclusively for you while you get organised. In this case, a holding deposit may be negotiated to act as security for the lessor in the event that the lessee proceed with the lease. Whether or not the holding deposit is refundable will depend on what was negotiated between the parties to compensate the lessor for taking it off the market.
Are deposits refundable?
You may be prepared to pay a deposit, but only if it’s refundable if you change your mind or in some other circumstances.
Landlords may want an agreement where you don’t get your money back if you change your mind. You may be able to negotiate for the deposit to be refunded in full, or in part, if they are allowed to keep marketing the property.
Disputes often arise when you’re not clear about the circumstances where the deposit is refundable or non-refundable. There are a few things to think about when deciding if the premises are suitable for you, and if you wish to provide a holding deposit to secure the property.
These may include:
- Local council requirements (including a DA)
- Requirements of strata
- Suitability of the premises for the intended use
If these are not considered, you may find that the premises is no longer suitable for your business and decide not to proceed with your lease. In that case, you may lose your deposit, depending on the deal you’ve made. It’s a good idea to undertake these checks early. The Commission offers low-cost mediation services to help parties reach an agreement and avoid going to a court or tribunal. You may apply for mediation on our website.
Counting it towards the lease security or rent
It’s quite common when you have paid a holding deposit and then go ahead with the lease, that the landlord will apply the holding deposit to the agreed security deposit or rental bond, and/or to the first month’s rent.
This depends upon the deal you made when you handed over the deposit.
Payment of a holding deposit is often the sign of good faith that a landlord is looking for. However, you should still be clear about what happens if one party decides to walk away from the deal for any reason.
Potential tenants should keep in mind that the landlord is likely to have gone to some expense already, by paying an agent to negotiate, running due diligence checks and consulting a solicitor. The landlord doesn’t want to go through that expense again and again for the same property and so will often try to gauge whether a potential tenant is serious or 'just browsing'.
Where to get advice
The NSW Small Business Commissioner can help you if you have a commercial leasing issue or dispute.
We offer information, guidance and mediation services for businesses in all types of business-related disputes.
For many people, getting some initial strategic and procedural advice from us is enough to work out their issue. Contact us.