Commercial Lease Tenant Security Deposits

The Commercial Landlord’s Obligations, or Lack Thereof, in North Carolina

I have been asked by clients many times about the responsibilities of a commercial landlord with respect to a security deposit to be held during a lease term as security for the Tenant’s performance of its responsibilities under a commercial lease. Are there only certain types of uses that the security deposit might be used for, and must the deposit be held in a certain type of account? It is my belief that the number of questions I receive about this issue is related to the fact that there are clearly spelled out North Carolina statutory requirements applicable to the holding of a tenant security deposit in a residential lease setting.

North Carolina has one single set of statutes that concern the rights and obligations of parties to a lease. That set of statutes is known as the Chapter 42 of the North Carolina General Statutes, entitled “Landlord and Tenant”. Basically, except as otherwise set forth in this Chapter 42, or as set forth in a case interpretation (and relatively speaking Landlord-Tenant case law is not an area of significant case law in North Carolina) the lease is a contract where the parties may define the agreement, with a generally wide latitude as to legal obligations between themselves.

Within Chapter 42, there is a specific set of statutes collectively known as the “Tenant Security Deposit Act” (which is Article 6 of Chapter 42). All of the statutes in that Act, either directly or by reference, only apply to “residential dwelling unit” leases. With respect to residential dwelling unit leases, because of this Act, there are clear requirements on the amount of a security deposit that may be required by a landlord, the manner in which the funds may be held, the types of uses for which the money may be used, and the procedure that must be followed in reconciling funds with the tenant once the lease has expired or been terminated.

To my knowledge, none of these specified statutes in Chapter 42 have been applied to the commercial lease situation. Apparently, the legislature, when drafting these laws, recognized the difference in overall bargaining position between a typical residential setting, and a typical commercial setting.
It is not uncommon for a commercial lease to have a provision similar to the following:

“20. SECURITY DEPOSIT. Tenant shall deposit with Landlord the sum of _________, which sum Landlord shall retain as security for the performance by Tenant of each of its obligations hereunder (the “Security Deposit”). The Security Deposit shall not bear interest. If, at any time, Tenant fails to perform its obligations, then Landlord may, at its option, apply the Security Deposit, or any portion thereof required to cure Tenant’s default; provided, however, if prior to the Expiration Date or any termination of this Lease, Landlord depletes the Security Deposit, in whole or in part, then immediately following such depletion, Tenant shall restore the amount so used by Landlord. Unless Landlord uses the Security Deposit to cure a default of Tenant, or to restore the Premises to the condition to which Tenant is required to leave the Premises upon the Expiration Date or any termination of the Lease, then Landlord shall, within thirty (30) days after the Expiration Date or any termination of this Lease, refund to Tenant any funds remaining in the Security Deposit. Tenant may not credit against or deduct the Security Deposit from any month’s Rent.”

This common provision could create some uncertainty as to statutory compliance in a North Carolina residential lease. However, unlike a residential security deposit, it would appear that in North Carolina, a commercial landlord is not required to hold a security deposit in any special type of account, is not limited as to the amount that might be required, can hold the security for any type of default of the tenant, and does not necessarily have to account or report in any set way, or in any set time frame, as would be required in the lease of a residential dwelling unit. Obviously, though there is no legal requirement, some of the practices mandated in the residential setting might in fact be good business practices in the commercial lease setting. Regardless, whether or not to hold a security deposit, and in what amount and under what terms, is therefore ultimately a business decision in North Carolina, subject to negotiation between the parties to the lease. Arguably that is exactly where the decision is best made in a commercial setting.


Tom Grella