Most leases (especially residential leases) require the payment of a security deposit to protect the landlord from non-payment and damage to the property.
Alternative Clause Elements
Form of Deposit—Letter of Credit
Interest Bearing (Tenant Favored Clause)
Tenant shall deposit the Security Deposit with a financial institution in an account of Landlord to be designated by Landlord upon signing this Lease (the “Security Account”). Landlord shall be required to segregate the Security Deposit from the other funds of Landlord and maintain the Security Deposit in the account together with all interest accrued thereon until the Security Deposit is applied or returned in accordance with the terms hereof. The Security Account shall be an interest bearing account offering the highest yield generally available for deposits similar in amount to the Security Deposit.
Non-Interest Bearing (Landlord Favored Clause)
Tenant shall not be entitled to receive and shall not receive any interest on the Security Deposit, and Landlord may commingle the same with other monies of Landlord
Optional Additional Clause Elements
Restoration of Applied Funds. Tenant shall, upon demand, restore any portion of the Security Deposit which may be applied by Landlord to the cure of any default by Tenant.
Transfer of the Property. In the event of a sale or transfer of Landlord s interest in the Premises or the Building, Landlord shall have the right to transfer the Security Deposit to the purchaser or lessor, as the case may be, and upon any such transfer Landlord shall be relieved of all liability to Tenant for the return of the Security Deposit, and Tenant shall look solely to the new owner or lessor for the return of the Security Deposit.
Nature of the Deposit. The Security Deposit shall not be considered an advance payment of rental or a measure of Landlord’s damages in case of default by Tenant.
“The typical landlord lease form will require the tenant to deliver a cash security deposit upon lease execution and permit the landlord to hold such deposit interest free throughout the lease term. A tenant with a great deal of leverage may be able to successfully eliminate this requirement. However, a tenant with somewhat less leverage still may be able to change the form of security (e.g., substituting a letter of credit for a cash deposit) or make the obligation less burdensome in terms of duration or amount (e.g., providing for the release or reduction of the deposit at some point during the lease term). A letter of credit represents an interesting alternative to a cash deposit, especially if a tenant has a good relationship with its bank, it which case it may be able to provide the letter of credit without depositing any supporting collateral. If the letter of credit comes from a reputable bank and the draw down procedures are relatively simple and failsafe, many landlords will accept such security.”
1. General Information on Security Deposits. See, Security Deposit Information (under California Law); Security Deposit Law in Residential and Commercial Leases
2. Interest on Security Deposit. "Tenants should be aware that unless otherwise provided in their lease, commercial landlords will not typically return interest earned on security deposits to tenants following the termination of a lease and there is no such requirement under Pennsylvania law." Pennsylvania Commercial Leases 101.
3. Effect of Bankruptcy of Tenant. "Letters of credit provide a distinct advantage to a landlord in this regard. The "independence principle" holds that letters of credit and the proceeds of letters of credit are not property of a bankruptcy estate." Letters of Credit Offer Landlords Protection against Tenent Bankruptcies.
4. Effect of Bankruptcy of Landlord. In the event of bankruptcy of the landlord, a tenant's "security deposit might be lost. In many cases, commercial leases provide for the security deposit to be given to the building owner and the building owner has the ability to commingle the money with other money used for the operation of the building. When money is commingled and the owner files for bankruptcy, you, as a tenant in the building, may become an unsecured creditor of the landlord and if there are no funds to pay off unsecured creditors, you may lose that security deposit." Commercial Lease Security Deposit At Risk In Bankruptcy