Commercial Security Deposits in Saudi Arabia

In Saudi Arabia, commercial security deposits are primarily governed by the Civil Transactions Law (Royal Decree M/191), which became effective on 16 December 2023, and the Real Estate Brokerage Law (Royal Decree M/130). The Ejar regulatory framework serves as the mandatory platform for commercial leases and the neutral custodian for security deposits.

Commercial Security Deposit Regulations

Under the Civil Transactions Law and the Real Estate Brokerage Law, security deposits for commercial properties are subject to specific regulatory oversight to ensure transparency and performance of lease obligations.

• Return of Property (Article 435): The lessee is legally obligated to return the leased property to the lessor upon the expiration of the lease in the same condition it was received, with the exception of normal wear and tear.
• Down Payment Cap (Article 13): Any "Down Payment" (Arboon) paid to secure a commercial lease transaction is legally capped at 5% of the total transaction value. Any amount exceeding this 5% is legally treated as an advance payment of rent rather than a deposit.
• Advance Rent: Landlords may request advance rent payments as part of the commercial agreement, which is governed by the payment schedule in the Unified Ejar Contract.

Custody of Commercial Deposits

The custody of commercial deposits is strictly regulated to protect both parties. While Ejar handles the registration of the lease, the physical holding of the funds is managed through approved regulatory channels.

1. Neutral Custody (Article 12): If a real estate broker is involved, they must receive the security deposit (Daman) and deliver it to the Real Estate General Authority (REGA) or its authorized representative (the Ejar platform). The deposit is held by REGA/Ejar as a neutral third party until the property is returned without damage.
2. Broker Restrictions (Article 16): A real estate broker is prohibited from using any received deposit for purposes other than those intended and must process all financial guarantees through the approved regulatory channels (Ejar).
3. End of Term: Upon lease termination, the refund or application of the deposit is processed through the Ejar system based on the condition of the property and contractual fulfillment.

Alternative Security

Commercial landlords frequently utilise alternatives to cash deposits:

• Bank Guarantees / Letters of Credit: The preferred method for institutional and high-value commercial leases.
• Parent Company Guarantees (PCGs): Common for corporate tenants where a subsidiary is the signing party.
• Personal Guarantees: Often required for SMEs or startups with limited financial history.

Deductions for Commercial Damages

A commercial landlord may seek deductions from the security deposit for:

• Severe damage to the shell or structure of the building (beyond normal wear and tear).
• Unpaid, contractually obligated utility bills.
• Failure to return the property to its original state as required by Article 435 of the Civil Transactions Law.

Normal Wear and Tear

Commercial landlords cannot deduct for standard wear and tear inherent to operating a business (e.g., minor scuffs on warehouse floors or faded paint in a high-traffic retail zone).

Resolving Disputes

If a business disputes the landlord's deduction claim, the process follows a specific regulatory path:

1. Expert Review: Disputes regarding damages and deposit deductions are initially referred to specialized experts designated by REGA (Article 12, Brokerage Law).
2. Enforcement: If the Ejar contract is used to recover undisputed debts, the Enforcement Court has jurisdiction.
3. Litigation: For substantive disputes that cannot be resolved by REGA experts, the Commercial Court (if both parties are merchants) or the General Court handles the ruling.

Commercial landlords typically rely on strict vetting of a company's financial health and contractual protections rather than statutory deposit limits.

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