Follow up question about holding deposits.
Question:
This is a follow-up question to the one I recently posted regarding holding deposits.
My intent is to have a holding deposit agreement from these potential tenants, as I want to be sure that these people are not going to back out if I take the house off the market for other potential renters.
I’ve written up a short agreement for myself and the potential tenants to sign. Basically, it says that I am receiving a specific dollar amount from them to hold the house until they sign the lease and move in on a particular day in the future. As long as they fulfill their agreement and move in, I will take those monies and apply it towards the security deposit. If they, for whatever reason, decide not to sign a lease and move in, they forfeit those monies. I wanted to be sure that,
legally, I would be allowed to keep those monies since I took the house off the market, assuming that they were going to honor our agreement of signing a lease and moving in to the property.
I thought this was a fair and equitable agreement for both parties, but I don’t want to do anything that is not legal! Any further advice that you can provide me will be greatly appreciated.
Answer:
The following is a shorter version of an article I once wrote regarding holding deposits. In my efforts to reduce the article to a reasonable length within a reasonable time I may have ended up with something that is not as well organized, as I’d have liked, but I think it will be adequate for your needs.
Sometimes, when the rental market is tight, applicants may offer a holding deposit to take the rental unit off the market until the applicant’s screening and verification is complete. Other times, a holding deposit may seem appropriate when an applicant appears committed to the rental, but must make arrangements for the move-in funds. The holding deposit is not a security deposit, but is to compensate the landlord for damages suffered for holding a unit off the market in the event that the applicant fails to meet screening qualifications or rescinds his/her agreement to rent the unit.
It is best to avoid the use of holding deposits, particularly now that most verifications of qualification can usually be done within a relatively short time utilizing today’s technology. Although holding deposits may be legal in your state, they often lead to misunderstandings or even legal hassles. A major problem is that most states do not cover the subject adequately, if at all in their statutes and it is often unclear regarding how much of the deposit may be retained by the landlord in the event screening results are unsatisfactory or the applicant cannot come up with the necessary funds or simply changes his mind about wanting the unit.
Although holding deposits are best avoided, sometimes they are helpful because of market conditions. A landlord can take holding deposits in most states. If allowed by your state, it might be better to utilize a holding deposit rather
than lower qualifying standards or reduce the rent. For the landlord’s protection, holding deposits should always be in cash, cashier’s check, or money order and for the protection of both parties there should always be a written agreement detailing the conditions related to the deposit even if not required by law.
When the landlord holds the rental unit for an applicant, it should be considered off the market and unavailable to other qualified prospective tenants who may have to be turned away. If the applicant later changes his/her mind, the landlord may have suffered financial harm. In such a case, the landlord is justified in retaining all or part of the holding deposit within the limits allowed by state law. However, be sure that this scenario is discussed in a signed agreement.
The written holding deposit agreement should be in accordance with any applicable state law and unambiguously cover the following issues:
- The address of the rental unit,
- The names of landlord and applicant,
- A clear statement that the deposit is a “holding deposit” rather than a security deposit.
- The amount of the deposit,
- The length of time (including exact ending date/time) the landlord is willing to hold the rental, taking into account the size of the deposit and other qualifying information,
- The basic terms of the lease agreement,
- The conditions under which the landlord will rent the unit to the applicant – e.g., verification of identity, a fully completed application form, satisfactory results on all applicable screening reports, verification of employment, and
full payment of the security deposit and first month’s rent by the end of the holding period, - What will happen to the deposit if the applicant signs a lease agreement – usually, that the full holding deposit will be credited to the security deposit,
- What will happen if the applicant decides not to rent the unit before being notified whether or not his/her application has been approved,
- What will happen to the holding deposit if the applicant fails to pass screening – usually the full deposit should be returned if the failure is evident within a couple of days after the landlord has accepted the holding deposit, and
- What will happen to the holding deposit if the applicant defaults on the holding agreement – specifically, how much the landlord will retain, this being in accordance with any applicable state law, and when and how the portion not being
retained by the landlord will be returned to the applicant.
Some states that cover holding deposits by statute specifically allow a landlord to retain an amount related to the landlord’s cost of holding the unit. This might include the costs of additional advertising, prorated rent for the holding period, and perhaps a reasonable charge for the time related to paper work and inconvenience to the landlord. Holding a larger amount puts the landlord at risk for a lawsuit. Some states specifically require that there be a written contract that states the terms and provides a receipt for the amount. The receipt can be included within the agreement, of which a copy must be provided to the applicant.
The amount of the holding deposit should be reasonably related to the rent of the unit and should take into account the potential inability of some applicants to immediately put up significant deposit funds in addition to application and/or screening fees.
In summary, landlords must follow any laws of their states and they should use good judgment and be fair in their holding deposit policy. An applicant whose holding deposit is retained without adequate justification may well have a cause of action for damages against the landlord which can result in more time and expense than the deposit was worth.