Deposits & Fees Between Landlords and Tenants – Part 1
Deposits & Fees, a Review – Part 1
The failure of some landlords to establish clear and fair systems of setting, collecting, and accounting for deposits and fees has contributed significantly to the negative landlord image. Especially grievous has been failure to refund deposit amounts not applied to unpaid rent and/or physical damages caused by the tenant. Unfair handling of deposits has resulted in legislation in most states over the past decades that now regulates almost every aspect of rental housing deposits.
Part 1 will discuss a variety of deposit and fee issues. Security deposits, most often a problem issue, will be covered in a future Part 2.
Fees vs. Deposits
A deposit by definition is refundable as long as the tenant adheres to the terms of his/her lease agreement. Some landlords try to get around statutory requirements for security deposit limits by assessing separate so-called non-refundable deposits for cleaning, pet damage, etc. Therefore a “non-refundable deposit” is nothing more than a “fee” and it may be considered unfair dealing to refer to something that is non-refundable as a “deposit.” In some states, landlords are specifically prohibited from charging any amount that is non-refundable except if it is rent. Furthermore, when a non-refundable “fee” is collected, the tenant will consider the money as being already forfeited and not worry about the matter for which the fee is collected. For example, if a “cleaning fee” is collected by the landlord, why should the tenant leave a clean unit at the end of the lease term? A judge will likely not allow deduction of cleaning costs from a security deposit if a cleaning fee was collected up front. For that reason and because fees collected up front are more of a burden to applicants than paying a little more rent each month, it is usually best to charge a higher rent rather than collect fees.
Holding Deposits
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 is appropriate when an applicant has committed to the rental, but must make arrangements for the move-in funds.
In any case, the landlord should restrict the length of time he/she is willing to hold the rental, taking into account the size of the deposit and other qualifying information. If the landlord chooses to use a holding deposit arrangement, it is recommended to draw up a written agreement detailing what each party understands.
Some landlords routinely require that multiple applicants each provide a deposit to hold a rental unit until their application and credit is approved. As it should be, in most cases the deposit is returned if the applicant is denied and the deposit is applied against rent and security deposit if the applicant is successful. There is no legitimate reason for a landlord to keep the deposits from unsuccessful applicants and a judge would not likely allow such a thing to stand. Whatever the policy, be sure that it is clearly stated in the application form or other document that is signed by each applicant.
When the landlord holds the rental unit for a deposit from only one applicant, it is 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 property owner may have suffered financial harm in the form of a lost business opportunity. In such a case, the landlord is justified in retaining all or part of the holding deposit. However, be sure that this scenario is discussed in a signed agreement.
Verifications of qualifications can usually be done within a relatively short time utilizing today’s technology. Accordingly, there is little reason to collect any holding deposit until you have selected a qualified tenant who still wants the property.
In any case, landlords and agents 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 property owner. Accordingly, unreasonable retaining can create more trouble than it’s worth.
If you do collect a holding deposit, you should have a written agreement that unambiguously defines the terms of the deposit. Some possible terms are:
- Upon move-in, the Holding Deposit shall be applied to the first month’s rent.
- The Holding Deposit is not a security deposit, but is to compensate Landlord for damages suffered for holding a unit off the market in the event that applicant rescinds his/her agreement to rent the unit.
- If applicant decides not to rent the unit before being notified that his/her application has been verified and accepted, applicant is entitled to the full refund of Holding Deposit.
- If applicant’s application has been rejected, he/she is entitled to the full refund of the Holding Deposit.
- After applicant has been notified that his/her application has been verified and accepted and applicant rescinds the agreement to rent the unit for whatever reason, then the amount of damages to be deducted from his/her Holding Deposit shall be $________________ per day from the date he/she agreed to rent the unit (the day the unit was taken off the market) until the day he/she gives notice of his/her rescission plus an equal number of additional days to compensate for lost marketing time and additional advertising expenses incurred. If the landlord’s damages exceed the amount of the Holding Deposit, then he/she agrees to pay the difference within five calendar days of request.
- The applicant must acknowledge that calculating damages suffered for holding a unit off the market includes many variables which are sometimes difficult to identify precisely and therefore agrees that the formula presented above is a reasonable method of establishing such damages.
- In the event landlord re-rents the unit within the time frame for which deductions have been made from the Holding Deposit, then applicant shall be credited an amount equal to the daily rent stated above for each day that rent was collected for the unit.
Processing Fees
Landlords can charge a fee for processing each application and for the specific screening services purchased from vendors. How much can be charged depends upon several factors.
First, whether your state is one that regulates the amount by statute and, if so, what the law says.
Second, what amount do you think you could convince a Judge was “reasonable” if your state’s statutes either use that term in its law or if the state does not cover the issue at all.
Third, how much time will be spent on processing and verification? Both the amount of time and the amount paid to vendors will vary greatly, depending on how much verification you do. Obtaining more reports means more paid to vendors and more time spent on analysis. Verifying employment, references, and previous landlords takes a significant amount of time.
However, no matter how much work is involved, you must consider that the amount of money required up front by a tenant will affect the number of potential tenants who apply. This is particularly true regarding non-refundable fees.
Running all possible reports on two adults in an applicant family will require an unacceptable expenditure unless the costs-per-applicant is kept fairly low. Even if your state doesn’t regulate fees and you’re not worried about whether a Judge calls them reasonable, you won’t get nearly as many application submissions if you charge $40 for processing and try to make an additional $5 profit on each of four $5 vendor reports ($10 for each of the four reports), a total of $160 per family. Although an acceptable total fee will vary greatly, depending on the location and type of property, in most cases, you will have to be satisfied with a relatively small processing fee plus only the actual cost of vendor reports in order to avoid the fees seriously reducing the number of applicants.
Typical total fees might consist of a payment of a non-refundable application fee of $20 plus a non-refundable charge of $15 for credit report and eviction record check on each adult applicant. This probably means that you would be absorbing some costs if you also do criminal record checks. The total of $35 is, of course, required at the time that the application is submitted. This still totals $70 for two adults, a significant amount when they may also have to apply for other vacancies if not selected for yours.
Fees collected to run credit reports and other screening reports should be used only for those reports, including the time required to process them, and the fee should be returned to the applicant if reports are not run. It should be made clear to applicants that the fees are not to be considered a holding deposit.
Many landlords with high-end property and many property management companies hire a tenant screening service to check evictions, credit, employment, and/or references. Those costs usually range from $25 to $100 per person, depending mostly on what reports will be included. Landlords of low-end property will not usually receive applications if charging $100 per person for screening, so must usually do much of the work themselves.
Cleaning & Redecorating Deposits/Fees
Some states allow landlords to collect cleaning and/or decorating fees. Although they are often called deposits, that is improper because in almost all cases, such fees are nonrefundable. Such fees are not legal in other states.