Deposit agreement: when and what to include

What is a deposit, and when is it used?

A deposit is a payment of money made as security for the performance of an agreement. The depositor (the one who pays it in) makes the amount available to the other party, who can use it as compensation if the depositor breaches the agreement.

Deposits are used in many contexts:

• Tenancies: the tenant pays a deposit as security for rent payments and any damage
• Commercial leases: similar, but with freer agreement on the amount
• Purchase of real property: binds the buyer's and seller's intentions before final transfer
• Service contracts: the supplier requires a deposit as security against order cancellation
• Equipment hire and short-term rental: the lessor protects against damage and failure to return

In most cases the deposit is governed as a clause in the overall agreement (for example the tenancy agreement). But in certain situations it makes sense to draw up a separate deposit agreement, a standalone document that governs the deposit alone.

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When should you draw up a separate deposit agreement?

A separate deposit agreement makes sense when:

• The deposit is paid before the main agreement is signed, for example on reserving a property or a service
• The terms of repayment are complex and should appear clearly and separately from other contract terms
• The deposit is paid in a relationship that is not otherwise formalised in a contract, for example when lending equipment between private individuals
• You want a standalone, signed document as documentation towards a bank, an auditor or a third party

In tenancies, the deposit is typically governed directly in the tenancy agreement. A separate deposit agreement is not necessary but can be used as a supplement to the tenancy agreement to clarify the repayment terms.

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Deposit in tenancies, the rules you should know

In private tenancies there are special statutory rules on the deposit in the Tenancy Act (lejeloven):

• Maximum: the deposit may not exceed 3 months' rent (excluding on-account contributions for heating, water and electricity)
• Prepaid rent: in addition to the deposit, the landlord can demand up to 3 months' prepaid rent
• Two separate amounts: the deposit and the prepaid rent are two separate amounts, both limited to 3 months
• Duty of repayment: the deposit must be repaid within a reasonable time after move-out, with deductions for documented damage and rent owed

If the statutory limits are exceeded, the tenant can demand the excess back. The landlord cannot freely dispose of the deposit during the tenancy, the amount is tied up and can only be settled on termination of the tenancy.

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What must a deposit agreement contain?

A properly drawn-up deposit agreement should contain the following elements:

1. Identification of the parties

Full names and addresses of both parties. State CPR or CVR numbers where relevant.

2. The amount of the deposit

State the precise amount in kroner. Avoid vague wording such as "a reasonable amount".

3. The purpose of the deposit

Describe briefly what the deposit secures, for example "security for the tenant's compliance with the tenancy agreement of [date]" or "reservation of [property] until the final sale".

4. Payment

When and how is the deposit paid? A bank transfer is preferable, as it provides documentation. State the account number and reference code.

5. Custody conditions

Should the deposit be held in a separate account? Does it bear interest? Who administers it?

For commercial leases and larger amounts, it is not unusual for the deposit to be placed in a separate client account with a lawyer or at a bank.

6. Repayment terms

The most important point: under what conditions is the deposit repaid?

• Full repayment: the conditions for full repayment (for example the tenancy agreement is fulfilled, no damage, no rent owed)
• Partial repayment: what deductions can be made, and for what?
• Forfeiture: when can the other party keep the deposit? (for example termination due to the tenant's breach)

7. Deadline for repayment

State a specific deadline, for example "within 14 days of the move-out date and a signed move-out report". In tenancies, tenants' organisations recommend a short deadline, but the law does not set a specific deadline beyond "a reasonable time".

8. Dispute resolution

What happens if the parties disagree about deductions from the deposit? State a procedure, for example voluntary negotiation, mediation or the rent tribunal (for residential tenancies).

9. Signatures

Both parties sign and date the agreement. Keep a signed copy.

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Deposit on a home purchase

When you buy a home, the seller typically requires a purchase deposit, proof that you are serious. Normally the purchase deposit is 5 to 10% of the purchase price.

The purchase deposit is in practice governed in the purchase agreement, but it is important to understand:

• The deposit is binding, you risk losing it on an unjustified cancellation of the transaction
• The right of withdrawal gives you 6 business days to withdraw, but only against payment of 1% of the purchase price to the seller
• The deposit is set off against the purchase price on completion

Here a separate deposit agreement is typically not necessary, as the terms appear in the purchase agreement.

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What can the deposit be used for?

The other party can only use the deposit for justified claims under the agreement. For example:

• Documented damage exceeding normal wear (in tenancies)
• Rent owed
• Costs of the tenant's failure to comply with reinstatement duties
• Compensation on unjustified cancellation of the agreement

The other party cannot use the deposit for:

• Claims that do not appear in the agreement
• Damage caused by normal wear
• Outstanding claims that are not documented

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Create your deposit agreement with LegalDock

LegalDock offers a deposit-agreement template that covers all the central elements and can be adapted to your situation, whether it concerns residential letting, a commercial lease or other contractual relationships.

The template can be completed in a few minutes and sent for digital signature directly in the platform.

Note: LegalDock provides legal document templates and general information. The content of this article is not legal advice. Contact a lawyer if you are in doubt about your specific situation.