Security Deposits and Guarantees in Kuwait Commercial Leases

In commercial real estate transactions (such as The Avenues, Boulevard complexes, or luxury administrative offices in Kuwait City), the security deposit is not merely an amount to cover electricity bills as it is in the residential sector. Rather, it is a complex credit tool used by property-owning companies to ensure the seriousness of the business and the continuity of the tenant company. This regulatory environment is primarily governed by Decree Law No. 35 of 1978, which has been in effect since August 16, 1978, and remains the foundational statute for rental guarantees.

Legal DisclaimerThis guide provides general legal information. Lease laws can change. Always consult a licensed notary or lawyer in this region.

Legal Prohibition: The "Key Money" (Khuluw Al-Rijl)

— Article 16 of the Rent Law

The most critical provision regarding commercial deposits and advance payments in the State of Kuwait is Article (16) of Decree Law No. 35 of 1978 (Real Estate Lease Law).

• Article (16) explicitly prohibits a landlord from collecting or stipulating the collection of any amount locally termed "Key Money" (Khuluw Al-Rijl) or "Initial Payment" as a premium for the conclusion or continuation of a lease.
• If it is proven to the Rental Department (Court of First Instance) that the landlord demanded a Key Money payment to open a business at their premises, the court may deduct this amount from future rent due to the landlord and treat the landlord as a violator of the law.

Alternative Commercial Guarantee Mechanisms in Kuwait

To escape the prohibition dilemma and secure their credit rights, owners of major real estate resort to demanding:

1. Cash Deposit

A lump sum (equivalent to 2 to 3 months of the rental value), kept in cash by the landlord for a period that is not refunded until after the final handover of the premises (Make-Good) and returning it to a "Core & Shell" state, and paying all finishing bills and Fit-out contracting fees.

2. Local Bank Guarantee

Major and foreign companies prefer submitting a certified letter of guarantee from a Kuwaiti bank for a period of one year and a value of several months. If the company absconds or defaults, the landlord may initiate legal proceedings to enforce the guarantee and recover the owed amounts. It is important to note that Kuwaiti law does not recognize 'self-help remedies,' and therefore, a court order is typically required to liquidate a bank guarantee and recover amounts due.

3. Crossed Cheques as a Guarantee

A cheque with no date issued but written in the name of the landlord. This is not recommended for companies because it exposes the company manager to criminal accountability if the cheque bounces due to insufficient funds at the police station (misdemeanor cheque cases). It is a highly dangerous pressure tool in Kuwait that is best replaced by a Bank Guarantee.

Returning the Deposit and "Commercial Clearance"

To release funds upon eviction, Kuwaiti real estate management companies are stringent in demanding a (Clearance Certificate - Baraat Thimma):

• A clearance from subcontractors to ensure no precautionary attachment is placed on the landlord's shop.
• A receiving report from the Fire Department (Civil Defense) confirming the safety of the shop's equipment.
• Proof of canceling the licenses from the landlord affiliated with the address from the Municipality and Commerce (so the address does not remain suspended to the previous company, preventing the landlord from renting it anew).

Landager software for the commercial sector provides the ability to "lock the account" and automatically withhold the deposit on the system until the landlord's employees complete the commercial (Move-out Checklist) to protect the complex from any surprises.

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