Tenant Protections
Security deposit burndown
Also called: burndown provision, deposit reduction, letter of credit burndown
A burndown is a schedule under which a tenant's security deposit or letter of credit is reduced over time as the tenant demonstrates payment performance. A typical structure steps the deposit down annually starting in year two, provided no monetary default has occurred.
A security deposit is dead capital. A burndown returns it on a schedule tied to the thing the landlord actually cares about, which is whether the tenant pays.
A workable structure
- Initial deposit equal to six months of gross rent
- Reduction to four months at the end of lease year two
- Reduction to two months at the end of year three
- No further reduction, or full release, at the end of year four
The conditions attached should be objective and narrow: no monetary default beyond the applicable cure period during the preceding 12 months, and the tenant not then in default. Landlord drafts widen this to any default, including non monetary and technical ones, which makes the reduction discretionary in practice.
Letters of credit versus cash
Larger deposits are often posted as a letter of credit. Points to confirm:
- The LC is drawable only on a stated event of default, not on demand for any reason
- The lease specifies what happens on a bank downgrade or failure, and gives the tenant a reasonable window to replace
- Transfer fees on a building sale are the landlord's cost, not the tenant's
- On expiration of the term, the LC is returned within a stated number of days
- The lease does not require the LC to remain outstanding for a period after expiration that exceeds the reconciliation cycle
Application and replenishment
Where the landlord applies part of the deposit to a default, the tenant is normally required to replenish within a short window. Confirm that a replenishment failure has its own notice and cure period and does not itself constitute an immediate default.
Relationship to the guaranty
Deposits and guaranties are alternative forms of the same credit support, which makes them tradeable. A tenant asked for both a large deposit and a full personal guaranty has a reasonable argument for reducing one in exchange for the other, and landlords frequently accept that trade because the guaranty is cheaper for them to hold.
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A personal guaranty makes an individual or a parent company liable for a tenant entity's lease obligations, so the landlord can pursue the guarantor directly if the tenant defaults.
A good guy guaranty is a limited personal guaranty under which the guarantor is liable for rent only until the tenant vacates the premises, surrenders them in the required condition, and pays everything owed through that date.
An estoppel certificate is a signed statement in which a tenant confirms the basic facts of its lease — rent, term, security deposit, and whether either party is in default — for the benefit of a buyer or lender.
This page is general information, not legal advice. Review lease language with qualified counsel.