Security Deposits in Commercial Real Estate in Ukraine

Securing the performance of obligations (particularly in the form of a guarantee payment or security deposit) is a standard practice in the field of commercial leasing in Ukraine, governed primarily by the Civil Code of Ukraine and the Commercial Code of Ukraine (both effective 1 January 2004). It serves as a security mechanism for the owner of an office center, warehouse complex, or restaurant space, mitigating risks associated with property damage or tenant default.

1. Deposit Size and Its Economic Nature

Unlike the residential sector, where the deposit is usually equal to one month's rent, rates in the commercial real estate market (especially for large corporations in Kyiv, Lviv, or Dnipro) are often higher:

• For office spaces and small retail, the standard is a security deposit equal to 1-2 months' rent.
• For retail spaces in premium shopping centers or industrial premises requiring significant redevelopment, the landlord may request a deposit equivalent to 3-6 months' rent, typically pegged to a stable foreign currency equivalent.

Legal Classification (Crucial for Tax Purposes): The money transferred to the owner may be named differently in the contract, and this determines accounting (VAT and income tax):

1. "Advance Payment" (for the last month): If the amount is treated as an advance for rent, VAT liability arises immediately upon receipt under the "first event" rule (Art. 187.1 of the Tax Code). For landlords on the general taxation system (Corporate Income Tax), these funds are recorded as liabilities and are not recognized as revenue at the moment of receipt per National Accounting Standard 15. However, for landlords on the Simplified (Single Tax) system, such advances are generally included in taxable income upon receipt (Art. 292.1 of the Tax Code).
2. Security (Guarantee) Payment: This is the recommended legal structure based on Article 546(2) of the Civil Code of Ukraine, which allows for "other types of security" established by contract (Article 560 applies exclusively to Bank Guarantees issued by financial institutions). If the deposit is contractually returnable and not a payment for services, it does not trigger VAT. While not considered revenue for Corporate Income Tax payers, landlords on the Single Tax system must ensure the deposit is strictly defined as a returnable guarantee to avoid it being included in taxable income upon receipt.

2. Withholding Funds and Covering Damages

A commercial lease agreement must exhaustively detail when the landlord has the right to debit (confiscate) money from the deposit. This usually happens without the tenant's consent ("by way of unilateral extrajudicial set-off of counterclaims") in the following cases:

• Arrears on rent exceeding X business days.

• Non-payment of utilities: Failure to pay utility bills or operational expenses (OPEX).
• Property damage: Compensation for physical damage to the premises, such as damage to storefronts, walls, or ventilation systems.
• Contractual Penalty: It is common for contracts to include a clause where the security deposit serves as a penalty if the tenant terminates the contract without the required notice.

"Top-up" Obligation: Commercial contracts almost always contain a rule: if the landlord legally debited part of the deposit (for example, to cover an electricity debt), the tenant is obliged to fully restore and top up the security deposit to its initial full amount within a very short period (e.g., within 3-5 banking days).

3. Procedure for Returning the Security Payment

During the final handover of the premises to the owner, strict corporate standards apply:

1. Official Handover Act: A detailed Acceptance-Transfer (Return) Act is signed. The premises must be returned in the same condition as it was received (excluding agreed-upon normal wear and tear). If the tenant was obligated (per the contract) prior to moving out to remove all their glass partitions, patch holes in the ceiling, and plaster the walls ("restitution to Shell & Core condition"), they must complete this before signing the Act.
2. Timeframes for Return: If the tenant has faithfully paid all bills and left no destruction, the deposit is subject to mandatory refund. In B2B practice, this does not happen "on the day the keys are handed over," but is delayed by 10-30 business days, because the owner (or their management company) needs time to receive the final consolidated utility bills from service providers.

Landager transforms the management of security deposits for the B2B real estate segment. The corporate dashboard segregates operational cash from guarantee funds. A property manager can reconcile the balance of a guarantee payment against the current currency equivalent, automate invoicing for top-ups following deductions, and ensure a transparent digital audit trail.

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