Avoiding security deposit pitfalls when renewing your lease
Wednesday, July 16, 2014
Tenants can hit some potential pitfalls with the security deposit when renewing a lease. To be successful in negotiating for the return of a security deposit, you have to know what to expect.
Even if you did not pay a deposit up front when you sign your initial lease, the landlord may try to add a deposit clause to your lease renewal. If you did pay a security deposit, the landlord may try to keep the deposit for a longer period of time as part of your renewal than the lease specifies.
If your rent increases with the lease renewal, the landlord may also ask for an additional deposit, arguing that your deposit was based on monthly rent, which has now increased, so the deposit should increase, too.
Expect resistance from a landlord and be prepared with your response and challenges. Your strongest argument during a renewal is to demonstrate that you're a proven, low-risk, rent-paying tenant. If you can point out that you've never missed a rent payment and are of little risk to the landlord, they have little justification to increase your deposit.
In fact, the landlord should return any deposit in place. In some cases, when we are negotiating renewals for our clients, we've shown the landlord proposals from other landlords courting the same tenant with no request for a deposit on a new lease term. This can be a strong bargaining tool. If another landlord doesn't expect a deposit from you on a new lease term, neither should the landlord who already knows your track record.
We frequently negotiates this matter for existing tenants, and we have found the following strategies to be effective to have a tenant's deposit returned (please note that these can prove to work with new tenants as well to reduce the need to pay an initial deposit).
Showing you're not a risk
Your credit score, the depth of your financial resources and so on may show that you aren't a risk to your landlord. A start-up business by a first-time business owner may be more susceptible to a new security deposit than an established tenant relocating to another property or opening up another location. If you were not in this strong position the first go-around on your lease, you now have a history of being a good, rent-paying tenant and have justification to request your deposit returned.
Using your improvements as leverage
If you take a vacant shell of a space and invest several hundreds of thousands of dollars building it out, fixturing it and stocking it with inventory, but then go out of business, you are leaving the landlord with reusable improvements far exceeding the risk the landlord took in leasing the space initially. The landlord would have no difficulty releasing their premises at a higher rental rate with your improvements.
If you plan to spend additional money to improve or update your space during your renewal, this argument is even stronger. When we inform the landlord of our client's plans to reinvest this money back into the business and the property, we have found they can be more willing to return the deposit.
If no real estate agent is involved, you know there's no commission being paid
Because landlords often use the security deposit to offset commissions to agents, the lack of a commission can strengthen your argument to avoid a deposit. With lease renewals, typically, there is no real estate agent or commission involved, and the landlord will have been collecting rent from you for several years. Therefore, a landlord will have less financial risk and will be in a better position to return your deposit.
Partial return or future return of your deposit
If the landlord refuses to return your full deposit as part of your renewal, you can negotiate to have a portion of it refunded (especially if the deposit was large initially). If the landlord has reservations about returning the deposit now, you can set a date during the renewal term — if the tenant has paid all of the required rental payments promptly by then, the deposit will be applied against the rent rather than being held in perpetuity.
Talk to your landlord before your lease expires about getting back your entire deposit as soon as you vacate the premises. Don't be afraid to bring the subject up for fear that the landlord may have some excuse for not giving the deposit back. But you can't determine if there is a problem (and then start to solve the problem) if you don’t ask before you move out.
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