Structure and Key Terms
Rent deposit deed: standalone document separate from the lease; entered simultaneously with the lease. Deposit amount: typically 3�6 months' rent + VAT; negotiated; may increase on rent review. Designated account: landlord holds deposit in separate, ring-fenced, interest-bearing bank account (name and sort code typically specified in the deed). Interest: accrues on deposit; credited to tenant annually or on return. Rent review/uplift: deed should address proportionate increase in deposit if rent increases. Reduction milestones: some deeds provide for phased deposit reduction after period of prompt payment and/or improved tenant financial position.
Drawdown Rights and Replenishment
Drawdown triggers: unpaid rent or other sums due under the lease; breach of any tenant's covenant; insolvency event; assignment without consent. Notice before drawdown: landlord gives written notice specifying amount and reason; tenant given opportunity to remedy within notice period (typically 5�14 days). No prior judgment required (unlike guarantee): major commercial advantage � landlord can draw down on default without court order. Replenishment: tenant must replenish deposit to full original amount within specified period (typically 10�20 business days) after drawdown notification; failure to replenish = further breach. Partial drawdown: landlord may draw down in tranches for successive defaults or in full if outstanding liability exceeds deposit.
Insolvency Risk � Trust vs Charge
Critical drafting issue. Trust structure: landlord holds deposit on express trust for tenant in designated account � deposit outside landlord's estate on landlord's insolvency; tenant recovers as beneficial owner. Fixed charge structure: tenant (company) grants landlord fixed charge over deposit account � landlord has priority proprietary security interest on tenant's insolvency. Companies House registration: fixed charge granted by tenant company must be registered at Companies House within 21 days of creation (CA 2006 s.859A) � failure = void against administrator/liquidator; landlord loses security. Tenant insolvency: properly registered fixed charge gives landlord priority over deposit; unregistered charge � landlord is unsecured creditor for deposit amount.
Tax Treatment � SDLT and VAT
SDLT: returnable rent deposit is not a premium; no SDLT (or LBTT/LTT) on deposit payment. Forfeited deposit: if permanently retained by landlord, HMRC may treat as non-returnable premium � potentially attracting SDLT. VAT on deposit payment: not a supply; no VAT at time of payment regardless of landlord's VAT status. VAT on drawdown (opted to tax property): drawdown applied against unpaid rent = supply of commercial accommodation = subject to VAT at 20%; amount treated as inclusive of VAT where not separately charged. VAT on interest: exempt from VAT (interest income; not a supply of services).
Return of Deposit and Assignment
Return at lease end: balance (less outstanding drawdowns and costs) returned after retention period post-expiry (typically 3�6 months) for dilapidations and other claims; interest returned with balance. Assignment: deed should specify what happens to deposit on lease assignment � options: (a) transfer to incoming tenant with replacement deposit; (b) return to outgoing tenant against incoming tenant providing new deposit; (c) landlord retains until lease end. Reduction milestones: phased return after clean payment record � e.g., 50% returned after 3 years; balance at year 5. Interaction with AGA: on assignment, if outgoing tenant provides AGA, landlord may accept reduced deposit from incoming tenant � expressly agreed in both deed and AGA.