Security deposit in commercial tenancy agreement in Poland

What is a security deposit in a commercial tenancy agreement?

A security deposit in a commercial tenancy agreement is to be understood as a sum of money specified in the agreement, paid by the tenant to the landlord to secure claims arising from non-performance or improper performance of the tenancy agreement. In practice, the security deposit primarily secures the timely payment of rent and other amounts due under the agreement, as well as claims relating to the improper use of the premises or a breach of the tenant’s other obligations.

A practical example from Polish case law:

“A security deposit for the lease of commercial premises is the most commonly used form of security for the landlord’s claims against the tenant arising from non-performance or improper performance of the lease agreement; it serves, as it were, as a guarantee of the proper use of the premises and compliance with the terms of the lease agreement” (judgement of the Polish Court of Appeal in Kraków, 1st Civil Division, dated 29 January 2015, case no. I ACa 1561/14).

How should the security deposit be properly regulated in a commercial tenancy agreement?

A commercial tenancy agreement should precisely regulate the following matters relating to the security deposit:

• its amount,
• the deadline for the tenant to pay it,
• the scope of the landlord’s claims secured by the security deposit,
• the tenant’s obligation to top up the security deposit should the landlord make a deduction from it during the term of the agreement,
• the rules and timeframe for its return should the security deposit not be used to cover the tenant’s liabilities,
• indexation of the security deposit.

As security deposits in commercial tenancies are not comprehensively regulated by law, it is of key importance to precisely define all the above issues in the lease agreement. Carefully worded contractual provisions limit the risk of disputes between the parties and provide the landlord with effective security for their claims.

A practical example from Polish case law:

“At the outset of these legal considerations, it should be noted that the structure of a security deposit for the lease of commercial premises is not regulated by any legal act” (judgement of the District Court in Toruń, 5th Commercial Division, dated 23 October 2023, case no. V GC 1333/22).

What should be the amount of the security deposit in a commercial tenancy agreement?

The optimal solution is to link the amount of the security deposit to a multiple of the monthly rent (possibly increased by the service charges provided for in the tenancy agreement). For example, it may be stipulated that the security deposit shall be equivalent to three months’ rent, including service charges and value added tax.

This approach stems from the fact that the amount of the security deposit should be closely correlated with the tenant’s potential liabilities, in particular in respect of rent and other charges payable by the tenant, such as service charges.

At the same time, it should be borne in mind that the parties’ interests regarding the amount of the security deposit are opposed. The landlord seeks to establish the highest possible security, whilst the tenant is keen to limit the amount of the security deposit, as during the term of the tenancy they are unable to freely dispose of the funds deposited in the landlord’s account.

When should the security deposit be paid under a commercial tenancy agreement?

It is in the landlord’s interest for the security deposit to be credited to their bank account before the property is handed over to the tenant. This will prevent a situation where the tenant takes possession of the premises on the basis of a handover report, whilst the landlord has not yet received the security deposit.

What should the security deposit in a tenancy agreement cover?

It is in the landlord’s interest for the security deposit to cover their contractual interests as comprehensively as possible. The tenancy agreement should therefore stipulate that the landlord may make deductions from the security deposit in respect of:

• any outstanding charges arising from the commercial tenancy agreement (rent, individual charges specified in the tenancy agreement, etc.) and
• to cover any due and payable amounts arising from non-performance or improper performance of the provisions of the tenancy agreement, including contractual penalties and damages due.

Examples of situations in which the landlord may draw on the security deposit include, in particular:

• wear and tear of the leased premises exceeding normal use and the need to restore the premises to their original condition,
• compensation for unauthorised use of the leased property in the event that the lease agreement expires and the tenant continues to occupy the premises,
• costs associated with the removal or disposal of items left by the tenant on the leased property.

The security deposit in a commercial tenancy agreement does not solely serve to cover late payment of any charges arising under the tenancy agreement. The landlord may also draw upon it in other situations, provided this is expressly provided for in the contractual provisions, in particular in respect of claims arising from the tenant’s non-performance or improper performance of the agreement.

When should the tenant top up the security deposit?

Where the landlord sets off amounts owed to them against the security deposit, e.g. in respect of rent arrears, the tenancy agreement should provide for the tenant’s obligation to top up the deposit to its original amount, i.e. the amount prior to the set-off.

The agreement should also specify a deadline for topping up the deposit (e.g. 7 days) from the date the landlord makes the deduction.

Failure to fulfil this obligation may be further secured by a contractual penalty, e.g. equivalent to one month’s rent for each month or part thereof of delay. This arrangement significantly strengthens the security function of the security deposit in the tenancy agreement.

When should the landlord return the security deposit to the tenant?

The tenancy agreement should also specify the timeframe within which the deposit is to be returned to the tenant following the termination of the tenancy. As a general rule, if the tenant fulfils all the obligations set out in the tenancy agreement, the deposit should be returned within the timeframe specified in the agreement, or, if no such timeframe is specified, immediately upon termination of the tenancy.

In practice, the agreement often provides that the security deposit may be retained by the landlord for the period necessary to settle final accounts, in particular with regard to service charges (e.g. for water, electricity, gas or waste collection), which are settled after the tenancy has ended. In such cases, the deadline for the return of the security deposit is usually set at 60–90 days from the date the tenancy ends.

Is there a limitation period for a claim for the return of the security deposit?

Notwithstanding the above, the tenant’s claim for the return of the security deposit is subject to a limitation period. In the case of commercial tenancy agreements, this claim is classified as one arising from the conduct of business activities and, therefore, in accordance with Article 118 of the Polish Civil Code, it becomes time-barred after three years. As a general rule, the due date for the claim is specified in the lease agreement; where this is not specified, it is determined by the notice requesting the return of the security deposit. Therefore, if the landlord refuses to return the security deposit to the tenant, it is in the tenant’s interest to take legal action as soon as possible to ensure that the claim does not become time-barred.

Return of the security deposit and a change of landlord

In commercial property practice, it is common for the landlord to change during the term of the lease, particularly as a result of the sale of the property. In such a situation, it is crucial to ensure the effective transfer of security, including the security deposit, to the ‘new landlord’, and the tenant will, of course, have a claim for the return of the security deposit against the ‘new landlord’ to whom the security deposit has been transferred.

Should the security deposit in a lease agreement be subject to indexation?

The security deposit in a lease agreement may be linked to an indexation mechanism, in the same way as the rent. The parties may stipulate in the agreement that the rent will be subject to indexation based on the HICP (Harmonised Index of Consumer Prices), the Consumer Goods and Services Price Index, or any other measure of value other than money. Similar rules may also be applied to the security deposit, so that its amount remains commensurate with the current level of the claims it secures.

For example, a tenancy agreement may include a provision stipulating that the security deposit will be increased annually, always on 1 January, in the same manner as that applied to the indexation of the rent.

Summary

A security deposit is one of the most effective ways of safeguarding the landlord’s claims against the tenant arising from the tenant’s failure to perform, or improper performance of, the obligations imposed on them by the commercial tenancy agreement. However, given that effectively securing the landlord’s interests through a security deposit is a complex matter, the parties should address the issues outlined in this article in every commercial tenancy agreement.