Rent deposits – French commercial leases

In France a rent deposit is called a dépôt de garantie. As in England rent deposits are usual. The parties are free to enter into whatever terms they agree upon as rent deposits are not covered by the Commercial Code. The rent deposit should clearly state what it covers. This could be the rent, repairs, service charge, dilapidations as well as rates. It could be widely drawn and provide for any liabilities of the tenant to come from the deposit money.

Amount of deposit

It is open to the parties to agree the amount of the deposit. The amount of the deposit can be linked to the rental. This must be expressly covered in the lease. Otherwise the deposit cannot be increased at a rent review and can only be increased at a lease renewal.

However if the rent deposit exceeds the equivalent of 1 payment period if paid in advance or 2 payment periods paid in arrears then the landlord must by law pay the tenant interest. Thus for example if the rent is payable monthly in arrears a rent deposit of 2 months. If the rent is payable 3 monthly in arrears then any deposit over 6 months carries interest.

Sale of the lease

If the tenant transfers the lease to a new tenant the old tenant is entitled to the repayment of his deposit. However as the lease carries on, on the same terms, the new tenant is obliged to provide the same deposit.

Return of the deposit

The tenant must be refunded the deposit at the end of the lease if he has complied with the terms of the lease. The tenant cannot use the rent deposit to settle the last few months’ rent. If the property is sold the original landlord remains liable to return the deposit. On a purchase of the property the new owner cannot require the tenant to pay a further rent deposit. It is often the case that the lease will expressly provide for the old owner to transfer the deposit to any new owner. This is a sensible provision to insert as the old owner will have no further interest in the property.

End of the lease

The rent deposit becomes repayable when the tenant vacates the premises. The parties can agree provisions as to the timing for repayment. If the tenant has breached the lease then the landlord can apply the deposit money to rectify the breach.

Tax

The tenant cannot deduct the rent deposit as a business expense unless it has been forfeited by the landlord. It should appear on the tenants balance sheet as a cash asset.

March 2018
David Anderson
Solicitor-Advocate and Chartered Tax Adviser