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7 Law Notes Gen. Prac. 123 (1970-1971)
Landlord, Tenant, and Lender Lease Security Deposit Problems

handle is hein.journals/lwntgen7 and id is 123 raw text is: ANY DISCUSSION OF THE AMOUNT and nature of a security deposit under a least must include a dis- cussion of the other problems confronting the par- ties to the lease. Once the problems confronting the parties are understood, then the conflicting in- terests of the parties to the lease security deposit become more readily discernible.' A consideration of these problems would dis- close a substantial change from historical, to mod- ern lease transactions, not only in the nature of the transactions between the parties, but in the rela- tive positions of the parties themselves: In origin, the security stipulation found in leases was for the benefit of the landlord, and generally speak- ing, it was deemed unnecessary to insert language to protect the tenant, because the financial standing of the landlord ordinarily was a sufficient guarantee of the return to the tenant of the deposit at the ex- piration of the term. The ownership of the realty was in itself an assurance.2 Far more pervasive than the mere change in financial stature of the landlord, is the change in the nature of the landlord. Today, there is a trend in land development where the landlord functions in a dual role. First, he is a landlord in the sense that he rents land, buildings, or both, and the land and buildings are his investment, not his in- ventory. Secondly, he functions as a promoter- landlord. The promoter-landlord acquires options on grounds, obtains financing, sub-contracts the construction, obtains tenants, and finally erects a local shopping center. More likely than not, the promoter-landlord is interested in selling the proj- ect as quickly as possible. The promoter- landlord profits on promotion and sale of the proj- ects and not on the quality of leases on the long term basis and thus he proceeds from the promo- tion and development of one center to another center, with little consideration of the long range effects of his lease terms within any particular proj- ect, except where these leases affect the project's financing or ultimate sale of the project. Although Law Notes, July, 1971 Volume 7, page 123 Landlord, Tenant, and Lender Lease Security Deposit Problems by MARVIN KLAMEN Clayton, Missouri the promoter-landlord may have working capital, oftentimes he does not. The promoter- landlord wants to build a shopping center with as little capital outlay on his part as is possible. Frequently, the promoter-landlord will build a small shopping center because he is limited by the requirements of involvement of his own limited capital; of necessity, then, he must in such in- stances, deal with this small tenant. Perhaps a drugstore, grocery store, restaurant, hairdresser or even a pet shop will move into the center. Because the merchant who would lease in this shopping center is small, this merchant would ordinarily have lesg leverage, less financial stability, and less opportunity to adequately bargain and protect him- self. Due to these factors, the small tenant would normally be required to pay a security deposit.3 Because he has little capital, the small tenant has not, however, helped the stature of the small center in the eyes of the mortgagee. Since neither the landlord nor the tenant are likely to be finan- cially strong, there is little likelihood of obtaining par financing for the center. Paradoxically, it is this particular type of promoter-landlord that so desperately needs par financing because of his own limited financial resources. Not being a man of means, and unable to acquire par financing, the promoter-landlord seeks to acquire liquid capi- tal from some source other than the mortgagee. While the promoter-landlord may demand a secur- ity deposit from the tenant, professing to secure the tenant to the obligations of the lease, there is a possibility that the promoter-landlord may use the security deposit as a means of obtaining liquid capital. More often than not, many of the leases of such centers are executed prior to the completion of the construction, and in some instances, even before construction commences. The potential trouble to the lessee under these circumstances is easy to perceive. In fact, the tenant, because of his lack of REAL ESTATE © 1971 American Bar Association General permission to republish but not for profit, all or part of this material is granted, provided that reference is made to this publication, its date of issue, and that reprinting privileges were granted by permission of the American Bar Association Sections of General Practice and Young Lawyers.