A security deposit is an amount of cash provided by a lessee to the lessor at inception of a lease for lessor protection against defaults, delays or other failures of performance by the lessee, generally as a condition of approving the lessee’s credit for a lease. A security deposit is collateral – not a cost – to be returned to the lessee at the end of the lease term if the lessee has performed as contractually agreed. As collateral, it reduces the risk to the lessor and, thus, should lower the cost of the lease to the lessee.
Security Deposit = Collateral ≠ Cost
Under the UCC Article 9, a lessor has a security interest in a lessee’s security deposit only if the lease indicated that its purpose is to ensure that the obligations of the lessee under the lease are satisfied and that it is to be returned at the end of the lease term if the obligations have been met. A security deposit differs from advance rental payment in that the lessee must have the right to demand return of a deposit in cash, whereas the lessee has no right to the return of a lease payment as long as the lessor fulfills its contractual obligation.
Advanced Rental ≠ Security Deposit