This sum of money paid by the hotel, restaurant, and catering (HORECA) manager to the landlord of the leased premises guarantees the landlord against defects in maintenance or repair of the premises and against non-payment of rent and charges.
► What is a security deposit?
The security deposit, commonly but incorrectly called a guarantee, is a sum of money paid by the hotel, restaurant, and catering (HORECA) manager to the landlord of the leased premises to ensure the proper execution of the lease. A clause must specify the nature of the claims guaranteed by the deposit. It is customary for the deposit to serve as a guarantee to the landlord against:
– defects in maintenance or repair of the premises (entry and exit condition reports are mandatory);
– non-payment of rent and charges.
► How much is it?
The landlord sets the amount, but it is common to negotiate. Generally, it is equivalent to one term (month or quarter) if paid in advance, and two terms if paid in arrears. In practice, landlords often request a security deposit equivalent to two terms (2 or 6 months’ rent).
The security deposit is calculated based on the rent excluding taxes (not including all taxes).
A clause for adjusting the security deposit is commonly included in leases, taking into account rent indexation and the index specified in the lease (generally, the commercial rent index).
► Is a security deposit mandatory?
While it is very common in practice (not to say universal), the law does not require it.
► How is the security deposit financed?
It is generally collected by the landlord. At the tenant’s request, and to facilitate the start of operations, the landlord may waive the security deposit upon signing the lease. In practice, the tenant will often provide a check that will only be cashed during the lease term, once the new hotel, restaurant, or café (HORECA) operator has sufficient revenue. However, this solution is discouraged because it carries the risk that the landlord will cash the check before the agreed-upon date.
For new HORECA operators who lack sufficient cash flow, or those who don’t want to significantly deplete their reserves, a loan from a brewery—whether through a beverage distributor or not—is a common practice. This allows them to finance the launch of their business and the security deposit in exchange for a beer supply contract.
► Does the security deposit accrue interest?
Yes, if the security deposit exceeds two months’ rent. The applicable rate will be that of the Bank of France for securities-backed loans.
► What is the tax treatment of the security deposit?
For the landlord, it does not constitute income for the owner, as it is not intended to be retained. The tenant hotel, restaurant, or café (HRC) must record it on its balance sheet as a financial asset. It will be taxed on any interest received.
► What happens to the deposit if the building or establishment is sold, if the HRC is leased, or if the premises are sublet?
– If the leased property is sold during the lease term, the security deposit is generally returned by the original owner to the new landlord. The tenant HRC must therefore request its return at the end of the lease.
– If the HRC is sold, the security deposit is generally refunded by the buyer to the seller.
– If the HRC is sublet, it is paid by the subtenant to the tenant.
– In the event of a lease-management agreement, a security deposit, in practice of 3 to 6 months of rent, is agreed and paid by the lessee-manager to the owner of the hotel.
► When must the security deposit be returned?
The security deposit must be returned to the tenant (hotel, restaurant, or café) by the landlord at the end of the lease within a reasonable timeframe (estimated at two to three months after departure). The deposit will also be returned to the tenant-manager at the end of the lease agreement after all accounts have been settled.
The owner of the premises (or business) who wrongfully withholds the security deposit risks being convicted, being ordered to return it, and facing criminal penalties for breach of trust.
► Under what conditions can the landlord keep the security deposit?
This security deposit is used to cover any outstanding amounts owed by the tenant at the end of the lease, as well as any expenses the landlord of the premises or business may incur due to their tenant.
For leases signed or renewed on or after November 5, 2014, landlords can no longer pass on all expenses to their tenants.
“Decree No. 2014-1317 of November 3, 2014, implementing the Pinel Law No. 2014-626 of June 18, 2014, lists the expenses that cannot be passed on to cafes, hotels, restaurants, and nightclubs (CHRDs), for example:
– taxes, duties, and fees for which the landlord or owner of the premises or building is legally liable; in particular, the local business tax (CET);
– however, the landlord can charge the CHRD property tax and additional property taxes, as well as taxes, duties, and fees related to the use of the premises, the building, or a service from which the tenant benefits directly or indirectly;
– fees related to rent collection.”
– In a building complex, charges, taxes, fees, and the cost of work related to vacant units or attributable to other tenants.
Repairs concern the building’s structure and overall soundness.
The following are the landlord’s mandatory responsibility:
– major repairs (load-bearing walls, vaults, replacement of beams and roofing, dikes, retaining walls, and fences) (Article 606 of the Civil Code);
Examples: if a landlord includes roof repair and facade renovation expenses in the tenant’s charges, the tenant can contest this with the landlord or in court.
Since November 5, 2014, it is no longer possible to pass these charges on to the tenant. This is a significant change for cafes, hotels, restaurants, and nightclubs, as these charges could be very substantial. From now on, tenants will no longer have to pay them.
– Expenses related to work intended to remedy dilapidation or bring the rented property or the building in which it is located into compliance with regulations, provided that it falls under the category of major repairs (Article 606 of the Civil Code).
It is therefore advisable to consult a lawyer specializing in HRC when drafting leases, management or sublease agreements, and when buying or selling hospitality properties, in order to determine the treatment of security deposits, which can be substantial. The aim is to limit the risk of having to bear unjustified or excessive charges and to ensure appropriate financing.