Include Security Deposit Clause in Lease

A tenant that moves out before the lease expires may create costly problems for you—namely, finding a replacement tenant. Despite the breach—and the aggravation and cost it has caused for you—the tenant may try to recover its security deposit. That is what happened to a New York owner who, fortunately, had protected himself from such a situation by including a security deposit clause in the lease.

In that case, a tenant moved out of a commercial building before the expiration of the lease and sued the owner to recover its security deposit, arguing that it was entitled to the deposit because the owner found a replacement tenant. The owner asked the court for a judgment in its favor without a trial, but the court denied the request.

A New York appeals court reversed the decision because it found that the tenant's recovery of the security deposit was precluded by a clause in the lease providing that in the event that the tenant prematurely terminated the lease, it “shall forfeit all security deposits.” The appeals court also stated that the fact that the owner eventually secured a replacement tenant did not trigger the tenant's limited right under the lease to collect its security deposit. Moreover, the owner had to retain and pay a broker to find the replacement tenant, the appeals court noted. Because the tenant forfeited its security deposit under the terms of the lease, the owner was entitled to a judgment in its favor without a trial [Anagen, Inc. v. Damasco, December 2009].