The value of rental deposits
| Date | 13 July 2010 |
| Published date | 13 July 2010 |
| Pages | 250-262 |
| DOI | https://doi.org/10.1108/14635781011058866 |
| Author | Norman E. Hutchison,Alastair S. Adair,Kyungsun Park |
| Subject Matter | Property management & built environment |
The value of rental deposits
Norman E. Hutchison
Centre for Property Research, University of Aberdeen, Aberdeen, UK
Alastair S. Adair
University of Ulster, Newtonabbey, UK, and
Kyungsun Park
Youngsan Graduate School of Real Estate, Youngsan University,
Seoul, South Korea
Abstract
Purpose – This paper has two aims: to consider the negotiating strength of landlords and tenants in
lease negotiations; and to calculate the level of deposit which is necessary to mitigate income risk.
Design/methodology/approach – The paper reviews the existing literature on the negotiation
strength between landlords and tenants in different stages of the property cycle; investigates the well
established deposit system in South Korea for lessons that might be applied in the UK; estimates the
appropriate level of deposit using simulation methodology, given different states of the market; and
places the contractual arrangement in a legal framework.
Findings – Evidence from the Seoul office market suggests that deposits can be very effective in
protecting income return. In the UK during the down phase of the cycle, when supply of space exceeds
demand and business conditions are uncertain, tenants are unwilling to pay deposits and landlords are
more inclined to offer incentives in a bid to get the property let, even though the down phase is exactly
the time when a deposit system is needed most. Landlords should be looking through the cycle and
insisting that deposits are paid at the height of the market when their bargaining strength is stronger.
The deposit should be sufficient to cover the probability of income loss in the down phase of the cycle.
Based on market evidence in 2009, the amount of the deposit should be equal to at least 15 months rent.
Practical implications – The stability of the income return is one of the key features of real estate
both as an investment and as security. The use of rental deposits is a practical and straightforward
way of hedging the risk. The paper estimates the amount of deposit required and provides guidance on
the key heads of terms, which should be included in a deposit agreement.
Originality/value – The estimation of rental deposits has very little coverage in the literature. At a
time when income return is under pressure landlords need to be fully aware of the benefits of the
deposit system and the key factors that need to be considered when estimating the amount of deposit
necessary to offset tenant default risk.
Keywords Rent reviews,Income, Property management, Tenantdefault, Financial risk, South Korea
Paper type Research paper
1. Introduction
At its most basic level, income return depends on tenants paying their rent in full and
on time. The stability of the income return is one of the key features of real estate both
as an investment and as a security, but this stability is threatened by tenant default
particularly during the down phase of the cycle, introducing the potential for
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
The advice of Alasdair Maclure of Ledingham Chalmers LLP, Solicitors, Aberdeen on the deposit
agreements is gratefully acknowledged.
JPIF
28,4
250
Received September 2009
Accepted March 2010
Journal of Property Investment &
Finance
Vol. 28 No. 4, 2010
pp. 250-262
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781011058866
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