The security deposit is a guarantee. In the property industry, the security deposit usually occurs in the area of rentals. It is paid by the tenant, normally before moving into the rental property. The landlord therefore covers his receivables if the tenant does not fulfil his obligation to pay. The security deposit is regularly found in both commercial leases and all residential leases.1
In the residential sector, the security deposit must not exceed three months’ rent not including operating costs. The tenant can pay the security deposit in three equal monthly instalments, the first of which is due at the start of the rental. The two subsequent installments are paid accordingly with the following monthly rents.
The landlord must comply with certain rules in managing the security deposit. He must keep the security deposit either in a separate account that pays the usual savings interest rates on credit with three months’ notice. Alternatively, in accordance with section 551(3) of the Bürgerliches Gesetzbuch (BGB – German Civil Code), an alternative form of investment to the classic savings book can be chosen. However, this requires a contractual agreement with the tenant. A bank guarantee can also be chosen as a security deposit for rent. This is usually an absolute bank guarantee. In any case, the assets must be invested separately from those of the landlord to ensure security against insolvency.
In accordance with section 569(2a) BGB, the landlord can terminate the tenant’s lease without notice if the tenant is in arrears in his payment of the security deposit at an amount equal to twice the basic monthly rent.2
There are no clear guidelines regarding the security deposit for commercial leases. The parent companies of commercial tenants therefore often issue “letters of comfort”. There are no clear rules on the repayment date of the security deposit. The German Federal Supreme Court considers a period of six months after the end of the lease to be reasonable. In individual cases this can be exceeded if, for example, there are still outstanding receivables of an amount not yet known from the lease. These are often subsequent payments on operating cost for periods that have not yet been invoiced. In such event the landlord is permitted to retain at least a reasonable portion of the security deposit to cover these payments.3
If the rental property is sold during an ongoing lease, the buyer assumes all rights and obligations under the lease in respect of the tenant. It therefore also takes on the duty to repay the security deposit. If the tenant is unable to get its security deposit back from the new owner (e.g. due to insolvency), the old owner is still required to pay it back.4