Founders - The Hidden Risk in a Lease is Not Always the Rent
By John D. Evans, CFA, Founder & General Manager at SEIML
For many Founders, the first commercial lease feels like a milestone. It says: we are real, we have an office, we are building something. But inside that lease there is often a hidden risk that does not get enough attention:
The deposit
In Hong Kong, a commercial lease deposit can often be three months’ rent. In Central, that can be a very large amount of cash for an early-stage company. And for a Founder, cash trapped in a lease deposit is not just “security”. It is runway.
There are two risks that Founders should think about carefully.
1. The landlord may have wide discretion over deductions
Most leases allow the landlord to apply the deposit against unpaid rent, damage, reinstatement costs, repair costs or other alleged breaches. That sounds reasonable in principle. But the operational detail is often thin.
What counts as damage? - Who decides the cost? - When must evidence be provided? - How quickly must the balance be returned? - What happens if the tenant disagrees?
In practice, the landlord may have significant discretion to withhold part of the deposit, and the tenant may have limited leverage after moving out.
2. The tenant is taking credit risk on the landlord
This is the part many first-time Founders miss. When you pay a deposit, you are effectively lending money to your landlord. But do you know the landlord’s financial position? Can you see its balance sheet? Do you know whether it has debt secured on the property? Do you know whether it has other vacant units and cash flow pressure?
In Hong Kong, commercial buildings may be subdivided by floor or unit, with different landlords. Some landlords may be small private companies. Some may be offshore entities. Public information can be limited. So the Founder may be asked to pay a large deposit to an entity whose financial strength they cannot properly assess.
That is a real risk.
This does not mean Founders should never sign leases. But they should negotiate carefully. Possible protections include:
clearer wording on permitted deductions
a fixed timeline for returning the deposit
a requirement for invoices or evidence for any deduction
limits on reinstatement obligations
landlord company due diligence where possible
considering whether an office is really needed at that stage
For a mature company, a lease deposit may be a normal business cost. For a Founder, it may be several months of survival capital. Before signing the lease, ask one simple question: If this deposit is not returned on time, what happens to our runway?
Founders should negotiate the lease with the same care they negotiate a funding term sheet. What lease clause do you think Founders most often underestimate?
