Guidelines for preserving the commercial landlord’s right to retain the security deposit funds in the event of a commercial tenant’s bankruptcy

Courts have on several occasions been called upon to determine, in the wake of a commercial tenant’s bankruptcy, a party that is entitled to retain the security deposit funds, which were remitted to the landlord upon the signing of a lease. In this regard, does the said amount accrue to the lessor or, conversely, is the lessor required to remit it to the trustee?

The prevailing jurisprudence dictates the following: 

  • If the clause in the lease entailing payment of the deposit is more akin to a non-refundable payment of rent perceived beforehand in order to acquit outstanding arrears in the event of default by a tenant, such payment will be deemed an integral part and parcel of the landlord’s property upon its remittance, thereby rendering it enforceable against the tenant’s trustee in bankruptcy. 
  • Conversely, if such a clause is more akin to a security deposit (or guarantee deposit), insofar as the amount was remitted to the landlord to guarantee the tenant’s fulfillment of its obligations under the lease, the received payment will be unenforceable against the trustee in bankruptcy, since the guarantee to which it pertains was not realized prior to the date of bankruptcy.

 To ensure that the commercial landlord retains possession of the amount received, terms such as “security deposit” or “guarantee deposit” are to be avoided throughout the provisions of the lease. Nevertheless, it is strongly recommended that the deposit clause be worded to emphasize its non-refundable nature.

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