While landlords often ask for security deposits and/or personal guarantees on commercial leases, neither is mandatory or legally required. As a franchisee tenant, you should know that these can be negotiated. Unfortunately, many franchisee tenants don’t realize this and pay the landlord quite willingly – without negotiating the amount or the terms. The Lease Coach has been repeatedly successful in negotiating a reduced deposit for our tenant clients – and even no deposit at all! Deposit money, which generally doesn’t earn you a penny in interest, could better serve as working capital for your own business rather than as security for your landlord.
To begin, let us define and differentiate between the two terms. A security deposit is just that – financial security for the landlord in the event that the franchisee tenant doesn’t pay the rent or damages the property in some manner. The personal guarantee is the provision in a lease naming a guarantor who is held personally responsible for the payment of all the amounts for rent and additional rent as set out in the lease.
From your standpoint as a franchisee tenant, there is no advantage at all to putting down a security deposit or agreeing to a personal guarantee. By doing so, you tie up your money, money which the landlord may try hard not to give back to you if you don’t renew your lease. Conversely, a security deposit makes perfect sense to a commercial landlord as it gives him a chance to recoup some of the money he spends to attract and bring in a new tenant. Doing this can prove to be very expensive for a landlord!
Reasons why the landlord (really) wants a lease deposit:
- Cash flow. The commercial space may have sat vacant for some time, bringing in no income for the landlord.
- The landlord might have to offer monetary inducements (e.g. tenant allowance / free rent) to rent his space.
- The landlord might need to renovate the space to get it rented.
- The landlord has to pay real estate commission fees, in most cases. Fees for agents/brokers securing you as a tenant can cost the landlord a pretty penny – typically five percent of your base rent.
Before you agree to pay a deposit, know what you are getting into. Ask plenty of questions including “How much is the deposit?,” “Where will the deposit be applied?,” “Is the deposit fully refundable?,” “When will the deposit be returned to the tenant?,” and “When would the deposit not be returned?” Remember, most landlords will prefer that you pay a large deposit as soon as possible, and that you get as little of it back as late as possible. The Lease Coach negotiates for the best deposit terms possible so that you can keep more of your money.
When to Pay the Deposit?
Franchisee tenants can also benefit by knowing when to give a landlord a deposit. Instead of inadvertently writing a check and submitting it with your signed offer to lease, make your deposit due and payable three days after the landlord has executed the offer to lease back. Better yet, make your deposit due and payable three days after removal of conditions by both you and the landlord. Once the landlord is holding your deposit, he might well dig in his heels and lose any further motivation for negotiating with you or giving you concessions. If the deal falls apart and the landlord drags his feet with returning your deposit, not having that money may make it more difficult to move on and deal on another property.
Not paying any deposit, whatsoever, is obviously the most advantageous for franchisee tenants. The Lease Coach is frequently successful negotiates for a lower deposit or none at all as we can often demonstrate that you are not a business risk, use any improvements as leverage, use the fact there is no agent/broker involved (and thereby no landlord-paid commission is being dolled out) to your benefit and/or explain that the deposit depletes start-up capital needed to achieve business goals.
For existing franchisee tenants looking to renew and still having their deposit held by the landlord, we insist on a refund of that deposit. Even if you were a security risk for the first portion of your lease term, if you paid your rent regularly for all of those years, you are certainly no risk to the landlord for the renewal term.
Dale Willerton and Jeff Grandfield – The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013).
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