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Improper use of client account as a banking facility
SRA Case Study: Commercial rent deposits
Scenario
A law firm is instructed by the landlord of a new development of commercial properties to prepare the lease agreements. The firm is also instructed to receive, and hold in client account, the rental deposits that are paid by the tenants. These will be held the lease comes to an end and any conditions eg dilapidations are met.
SRA's View
The receipt and holding of commercial rent deposits in client account would not, in itself, breach rule 14.5. This is providing that the deposit properly relates to an underlying transaction on which the firm is acting, such as advising the landlord, preparing and completing the lease or drafting any rent deposit deed. We expect firms to promptly release the deposit once the work has been completed. This is, of course, a requirement in the SRA Accounts Rules.
Where, for example, services are being provided relating to advice on dilapidations that arise during the term of the lease or other professional services that relate to the management of the lease, this may mean that firms retain such rent deposits in client account for some time; even until the end of the lease when the funds may be distributed according to a specified scheme or provision. Firms need to be mindful that their obligations under the SRA Accounts Rules continue for the period they hold the deposit. They will need to make sure that they, for example, keep records, account for interest and promptly return monies to the client.
This can be contrasted with the situation where firms are holding rent deposits indefinitely and there is no reason for the money to be held in the client account, other than for the client's convenience. This would amount to a breach of rule 14.5.
In residential lease cases, most deposits taken by landlords and letting agents must be held in one of three government backed tenancy deposit schemes. There is therefore no reason why a law firm would need to hold residential rent deposits in their client account.