Some leases have conditions on those reductions.

Some negotiated commercial leases provide that the amount of the security deposit will “burn down” at specified times during the lease term. Modifying a lease to make the security deposit evergreen may become part of rent relief negotiations. Not all security deposits are evergreen – some leases do not require replenishment, and landlords should not assume that they will be entitled under the law to demand replenishment in the absence of a lease provision giving them that right. Under most leases, security deposits are “evergreen” which means that once the landlord applies the security deposit, the tenant is required to replenish it on demand. Moreover, as politicians and officials react to the financial distress caused by COVID-19, new governmental directives may impact the handling of security deposits. The law may prohibit any use of the security deposit until the lease terminates or expires. Particularly with residential leases, state and local laws can: (1) cap the size of the security deposit (and whether other deposits, like a pet deposit, could count towards the size limitation), (2) limit the use of the security deposit, and (3) specify the manner and timing of its application. Landlords should confirm that cash security deposits are held in a lawful manner and that the lease’s process for applying the security deposit does not conflict with applicable legal requirements. CONFLICTS BETWEEN THE LAW AND THE LEASE.We have flagged some considerations to keep in mind concerning preparing to use a tenant’s security deposit. That said, using a tenant’s security deposit may not be so easy. A negotiated commercial lease may require that before a landlord can use a security deposit, the landlord must give the tenant a written default notice and an opportunity to cure (within a specified time frame). Most leases allow landlords to use the security deposit to pay the tenant’s rent immediately or after a short grace period. Generally, landlords should follow the lease terms concerning how to apply a cash security deposit or draw down a letter of credit. At this point, some tenants may be asking their landlords to apply their security deposits to missing rent payments.

Landlords may be thinking about applying security deposits or drawing down on letters of credit to cover tenants’ defaults. Many commercial tenants failed to pay April rent.

Tenant default letter