What is the treatment of a rent deposit deed upon grant of a renewal lease?

This article was first published in Lexis PSL Property

A rent deposit deed is supplemental to the lease. The parties may enter into a deed whereby the landlord places the deposit into an interest earning deposit account in the landlord’s name and holds the balance throughout the term on trust subject to the provision of the deed as security for any default by the tenant. Alternatively, the parties can enter into a deed whereby the deposit, although paid to the landlord or landlord’s solicitor to deposit into an interest earning account in the name of the tenant, remains the tenant’s property and the landlord takes a legal charge over the rent deposit. Whichever method is used, the deed will specify the duration of the deposit arrangements and the circumstances requiring the deposit account to be closed.

A rent deposit deed is supplemental to the lease. The parties may enter into a deed whereby the landlord places the deposit into an interest earning deposit account in the landlord’s name and holds the balance throughout the term on trust subject to the provision of the deed as security for any default by the tenant. Alternatively, the parties can enter into a deed whereby the deposit, although paid to the landlord or landlord’s solicitor to deposit into an interest earning account in the name of the tenant, remains the tenant’s property and the landlord takes a legal charge over the rent deposit. Whichever method is used, the deed will specify the duration of the deposit arrangements and the circumstances requiring the deposit account to be closed.

If the commercial lease is one to which Landlord and Tenant Act 1954 (LTA 1954) applies, then there is an automatic statutory right to renew. However, if the lease does not have security of tenure then the parties can agree for the new lease to commence at the expiry of the current lease. This may be a reversionary lease, ie one that is granted now but starts at some point in the future. However, it may be a renewal lease granted pursuant to an option to renew contained in the original lease or one granted, eg some months after its expiry.

An increase in the length of the term of the original lease is regarded in law as bringing about an implied surrender of the lease and a re-grant of the lease. This process results in the benefit of the rent deposit in relation to the original lease being lost and if the re-granted lease is one to which the LTA 1954 applies, the tenant may have security of tenure.

To avoid this, if the landlord and tenant wish to extend the term, they can enter into a reversionary lease which takes effect at the end of the term of the existing lease. If a reversionary lease is not entered into, the parties can still enter into a renewal lease following the expiry of the fixed term. However, a new rent deposit deed will be required to confirm that it applies to the renewal lease.

See Practice Notes and Precedent: Concurrent and reversionary leases, Lease variations—surrender and re-grant issues and Reversionary lease.

Is a new deed required or can an existing one be ‘rolled over’ in the renewal of a lease?

A renewal lease will include a provision extending the term of years granted in the original lease. A new confirmation rent deposit deed would be required to confirm that the rent deposit applies to the renewal lease. However, provided that the original rent deposit deed was drafted so that the deposit did not become payable immediately upon the termination of the original term, then there is no need to return the deposit prior to entering into the new deed.

Does it make a difference if it is contracted-out or a protected lease under the LTA 1954?

If the renewed lease is to be contracted out of the LTA 1954, specific provision will have to be made in the renewal lease and the appropriate notices served under the LTA 1954. In relation to the original lease, the landlord will need to have served the appropriate notice before entry into the lease. The landlord would also need to make specific provision for contracting out of the LTA 1954 in the lease renewal. Further, the landlord would need to serve the appropriate notice before entry into the renewal lease to ensure that the renewal lease was also contracted out. The landlord would need to enter into a confirmatory rent deposit deed where the lease is contracted out.

The situation is different if there is a protected lease. In this case, the landlord will not be required to enter into a new rent deposit deed following the expiry of the original term.

If the lease is protected, would the rent deposit be a collateral arrangement or a term of the tenancy in an LTA 1954 renewal?

The payment of the rent deposit would be an express term of the Lease but the rent deposit deed itself would be a separate supplemental collateral arrangement.