What happens to restaurant deposits when you close involves three different categories of deposits, each with different rules and different financial implications. Most owners think about one of them and forget the other two.
The three types of deposits you need to account for
1. Security deposit from your landlord. When you signed your lease, you paid a security deposit -- typically one to three months of rent. When you close, you want that money back. Whether you get it depends on the condition of the space, whether you are current on rent, and whether your landlord has legitimate claims against the deposit.
2. Customer event deposits. If your restaurant hosted private events, you likely collected deposits from customers for future events. When you close, those customers are owed their deposits back. This is a real liability.
3. Vendor and utility deposits. Some vendors, particularly food and beverage distributors, require deposits from new accounts. Utility companies often hold deposits from commercial customers. When you close, you are owed these back -- but you have to ask for them.
Getting your security deposit back
Your lease specifies the conditions under which your landlord can withhold the security deposit. Common legitimate deductions include unpaid rent, damage beyond normal wear and tear, and costs to restore the space to its original condition.
To maximize your deposit recovery, document the condition of the space before you vacate. Take dated photographs of every room. Return all keys. Remove all equipment and personal property. Leave the space broom-clean. Send a written notice of your vacate date and request the deposit return in writing.
Most states require landlords to return security deposits within 14 to 30 days of the tenant vacating, along with an itemized list of any deductions. If your landlord misses this deadline, they may forfeit the right to make deductions in some states.
If you are behind on rent, the landlord will almost certainly apply the security deposit to the outstanding balance. If the deposit does not cover the full arrears, you still owe the difference. The security deposit does not eliminate your rent obligation -- it reduces it.
Handling customer event deposits
If you have collected deposits for future events that will not happen, you owe those customers refunds. This is not optional. A customer who paid a $500 deposit for a holiday party that you cannot host has a straightforward legal claim against you for that amount.
Pull your event booking records and identify every outstanding deposit. Contact each customer directly, explain that you are closing, and arrange refunds. Do this before you close the doors if at all possible. Customers who find out about a closure from a sign on the door rather than a direct call will be less understanding and more likely to pursue legal remedies.
The total amount of outstanding event deposits varies widely by restaurant type. A restaurant that hosted two private events per month at $500 deposits each might have $1,000 to $3,000 in outstanding deposits at any given time. A restaurant with a robust private dining program could have significantly more.
Recovering vendor and utility deposits
When you close, contact each vendor and utility company in writing and request return of any deposit on file. Include your account number and the address where the refund check should be sent.
Common sources of deposit recovery:
- Gas and electric utilities (commercial accounts often carry $500 to $2,000 in deposits)
- Food and beverage distributors (particularly for accounts established within the past two to three years)
- Linen and uniform services
- Alarm monitoring companies
- Waste management companies
These deposits are often forgotten because they were paid years ago and are not on anyone's radar. A systematic review of your vendor accounts can recover several thousand dollars that would otherwise be left on the table.
The net deposit picture
When you add up the deposits you are owed (security deposit from landlord, vendor deposits, utility deposits) and subtract the deposits you owe (customer event deposits), most restaurants end up net positive. The security deposit recovery is usually the largest single item.
The exception is a restaurant that is significantly behind on rent, where the landlord will apply the security deposit to unpaid rent and potentially pursue the remainder through the lease's personal guarantee provisions.
Related guides: What does it actually cost to close a restaurant? | Personal guarantee on a restaurant lease: what you actually owe | Who pays restaurant debts when it closes?