Get Extra Security Deposit from Tenants that Use Lots of Water
Some tenants—such as restaurants and Laundromats—regularly use water as part of their business. So you can count on their high water consumption to drive up your water bills.
As long as a tenant like this pays its share of the water bills in full and on time, you're in good shape. But if the tenant skips town, goes out of business, or is unable or unwilling to pay for its water use, you could be left with a huge bill to pay. The security deposit alone may not be enough to cover all the amounts the tenant owes you, including the charges for its water consumption. And that means you'll be left footing the bill, which could be several hundreds—or even thousands—of dollars.
To protect your finances, get a special security deposit—known as a “water deposit”—from these tenants to cover their water charges, suggests real estate expert Kevin M. Fogel. This is in addition to the usual security deposit you get at the start of the lease.
We'll tell you which protections to include in your lease to get a water deposit from a tenant that will consume water as part of its business. There's also a Model Lease Clause on p. 7 that sets up the water deposit, which you can adapt and use in your lease.
Determine if Tenant Is Candidate for Water Deposit
Get a water deposit from any tenant that's likely to consume water as part of its business, rather than just for personal use (for example, in the restrooms), recommends Fogel. These are the tenants whose water demands will be higher than usual.
Determine early in the lease negotiations if you're dealing with such a tenant. Then you'll know whether to add the water deposit clause to the lease, Fogel says. Reviewing the tenant's past water bills might also be helpful. A likely candidate for a water deposit clause is a Laundromat, restaurant, car wash, or beauty salon, he points out.
Six Protections to Include in Water Deposit Clause
If you're negotiating with a tenant that you expect to consume a lot of water for business purposes, make sure that your lease clause, like our Model Lease Clause, includes the following six protections:
Tenant Must Provide Water Deposit
Have the tenant agree to give you a water deposit after you demand it, says Fogel. And require the tenant to deliver the water deposit to you soon after your demand—say, within 10 days, says New Jersey attorney Marc L. Ripp. How much money should the tenant give you for the water deposit? You and the tenant will have to negotiate that amount. Here again, the tenant's past water bills can give you guidance, Ripp says. Or ask other owners that have experience with similar tenants what their typical water charges have been, he adds [Clause, par. a].
Water Deposit Is Additional Security
Make it clear that the water deposit is in addition to the standard security deposit required by your lease, says Ripp. Otherwise, the tenant may claim that the water deposit is just part of the standard security deposit, so it doesn't have to pay you anything more than that, he warns [Clause, par. a].
Get Right to Adjust Water Deposit
Get the right to adjust the amount of the water deposit at any point during the lease, says Fogel. For example, you may want to increase the water deposit amount if it's not enough to cover the tenant's highest annual or periodic water bill. This is important because the tenant's water consumption might be higher than expected. Or its consumption may increase because of changes in its business. Say that you'll notify the tenant in writing if you demand an increase in the water deposit, says Ripp. And require the tenant to give you the difference between the original amount and the increased amount quickly—say, within 10 days—after you demand it, he says [Clause, par. b].
Keep Water Deposit Until Last Bill Is Paid
Say in the lease that you can hold on to the water deposit until a final meter reading is made, the tenant pays all outstanding charges, and the payment is credited to your account, says Fogel [Clause, par. c]. These events could occur long after the lease ends, he warns. So don't let the tenant demand that you return the water deposit to it when the lease ends.
Get Right to Apply Water Deposit to Unpaid Water Bills
Say in the lease that if the tenant fails to pay all its water charges, you can pay them on the tenant's behalf from the proceeds of the water deposit, says Fogel [Clause, par. d]. You don't want any confusion about when and how you can use the funds in the water deposit.
Require Tenant to Replenish Water Deposit
Say in the lease that if you use any part of the water deposit, the tenant must replenish the amount used. Require the replenishment to occur quickly—say, within 15 days—after you notify the tenant that you drew on the water deposit. Since in some areas unpaid water bills can result in a lien being placed against your building or center, you'll want to make sure that you don't incur any unpaid water bills, says Fogel.
To add teeth to this requirement, say that if the tenant doesn't replenish the water deposit within the required time period, it will have caused a “material”—that is, serious—default, says Ripp [Clause, par. e]. This gives you the right to certain remedies, such as eviction, that wouldn't be available for less serious lease violations, he explains.
CLLI Sources
Kevin M. Fogel: President, KMF Property Group, Inc., 49 Irma Dr., Oceanside, NY 11572-5715; (516) 536-5881; kfogel@kmfpropertygroup.com.
Marc L. Ripp, Esq.: Counsel, The Gale Company, 100 Campus Dr., Ste. 200, Florham Park, NJ 07932; (973) 301-8057; MRipp@thegalecompany.com.