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Security Deposit and Why it is Necessary for Leases

Security Deposit and Why it is Necessary for Leases

Whenever we enter into leases, besides stamp duty and advance rental, security deposit is usually required and is included in the rental or tenancy agreement.

Most of the time, the security deposit amount is payable on the date of handover, however, this will still depend on the terms agreed between the landlord and tenant. It may be in the form of cheque or via bank transfer depending on the timeline and practices of the tenant and landlord. The good faith deposit issued together with the letter of intent may also form part of the security deposit.

Market Practice

As a common market practice, security deposit is necessary as it is a form of deposit or acts as a safeguard when it comes to leasing a property be it residential, commercial or industrial properties.

Similarly, when you rent any other products apart from properties such as cars, furniture or equipment, it is common for the party renting the product to you to collect a deposit as a form of safeguard.

If you were a landlord, you would also likely expect a security deposit as a form of safeguard as you have likely invested a significant amount into purchasing the property and servicing the mortgage if you have taken up a loan.

Late Payment

At times, as human beings, we may get too busy and overlook on certain payments due. For overdue payments, interests may also be charged at a certain rate. This is why security deposit is necessary.

Damage to Property

If there is any damage to the property whether due to negligence or due to any other reasons, the security deposit may be used to make good to original condition if not already rectified by the tenant. Of course, wear and tear is usually excepted.

Early Termination

This does not happen often, however, in a case of early or premature termination of lease, the security deposit deposit acts as a form of compensation to the landlord as the entire term of contract has not been fulfilled as per the tenancy or rental agreement.

Reinstatement or Return in Original Condition

As we know, it is only fair for a tenant to return the property to the landlord in original condition upon expiry of the lease as the landlord may still need to look for a new tenant or may need to occupy the premises after expiry of the lease.

As a tenant, the last thing we would like to see is a dirty warehouse with lots of rectification works to be done. This is why security deposit is necessary so that in a situation whereby reinstatement is not done properly, the security deposit amount can still be used to reinstate the property to original condition. Of course, fair wear and tear is excepted when we talk about reinstatement to its original condition.