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, or what the deposit should be.
Both parties should be clear about what the holding deposit is for, including whether it’s refundable and under what circumstances.
Taking the property off the market
You might want the property taken off the market and held exclusively for you while you get organised.
This is similar to taking an 'option' – where one party pays to have the right to either take the full deal or let it go by a certain date. If you don’t exercise the right (the 'option'), you will usually lose it, and you lose any money you had paid for that right in the first place.
However, while you have that right, nobody else can take the property. If the landlord or agent gives it to someone else before your option expires, they are denying you the right you’ve paid for.
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. But if they are allowed to keep marketing the property, or if they just don’t want to go ahead, they will give the deposit back.
Disputes often arise when you’re not clear about the circumstances where the deposit is refundable or non-refundable. For example, what if the local council approves your development application, but with onerous conditions? If you have to spend $25,000 that you hadn’t anticipated, you may not want to go ahead with the lease on the terms negotiated. In that case, you may lose your deposit, depending on the deal you’ve made.
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 dispute.
We offer information, advice and mediation services for businesses caught up 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.