Security deposit

What it means

A security deposit, also called a cash security, is a sum the tenant pays the landlord when signing a lease agreement. It covers unpaid rent, utilities or damage to the leased property. When the lease ends, the landlord returns it, less any justified claims.

When a flat is let to an individual, the Civil Code caps the deposit at three months’ rent and sets out when it must be returned. For commercial premises let between companies the law sets no cap, and the amount, return arrangements and interest are for the parties to agree.

Instead of a cash deposit, another form of security can be agreed, such as a bank guarantee, which does not tie up the tenant’s cash. For larger commercial leases, such as offices or warehouses, this is common practice.

How it works in practice

In the accounts a deposit is neither an expense nor income. For the tenant it is a receivable from the landlord; for the landlord a liability to the tenant. Depending on the lease term it is shown as current or non-current, and at stocktaking it is verified against the contract.

If the landlord uses part of the deposit when the lease ends, for example to repair damage or cover arrears, it makes a set-off, and the tenant books that part as an expense according to the nature of the claim. For VAT, neither paying nor returning a deposit is a taxable supply.

In short-term rentals through platforms, the deposit is often handled as a hold on the guest’s card. Even then the terms should state clearly what the deposit may be used for and how damage is evidenced.

What to watch out for

Disputes most often arise when the deposit is returned: what is normal wear and tear and what is damage. We recommend a handover report with photos when the premises are handed over and comparing it at the end of the lease. Without it, proving that damage occurred during the lease is difficult.

Beware of booking the deposit as rent. A tenant who expenses it reduces its tax base without justification, and a landlord who books it as income pays tax on money that is not theirs. The deposit must stay on the balance sheet until it is settled.