Deposits & Fees Between Landlords and Tenants – A Review Part 2
Deposits & Fees, a Review – Part 2
We complete this two-part article with brief discussions regarding Security Deposits, Pet Deposits, and Last Month’s Rent. These three items are (1) usually truly deposits rather than fees, (2) covered to some degree by statutes in most states, and (3) usually of amounts that improper handling is likely to trigger conflicts.
Security Deposits
A security deposit is money paid by the tenant to the landlord at lease signing and prior to the tenant’s occupancy of the rental unit. The general purpose of a security deposit is to provide the landlord with funds owed by the tenant if the tenant fails to pay rent on time and/or keep the rental unit in good condition. All states allow a landlord to collect a security deposit when the tenant moves in and to hold the deposit until the tenant moves out.
Security deposits are funds that legally belong to the tenant and remain a credit of the tenant during his residency unless and until some lease default by the tenant allows the landlord to utilize part or all of the deposit to reimburse the landlord’s financial loss resulting from the default. A security deposit is not rent. Collecting the first month’s rent upon move-in is not considered as part of the security deposit in most states. Accordingly, in the majority of states it is not included within the maximum limit of security deposit of the amount of security deposit that can be collected.
It is important that security deposits be collected before or at the time of lease execution and before giving possession of the premises to the tenant. It is also important that payments be in the form of cash, money order, or cashier’s check. Once the tenant has legal possession of the rental property, he/she can only be removed through eviction. Accordingly, if a personal check is worthless, it may take many hundreds of dollars and a couple of months’ time to legally regain possession and substantial additional dollars and time before the property is again readied for marketing and a new tenant is found.
How security deposits must be handled depends primarily on where the property is located. Most states have requirements related to security deposits, including one or more of the following:
- The maximum amount that can be required,
- Interest that must be paid on the deposit,
- Where the deposit must be kept,
- What can be deducted from the deposit,
- When the deposit must be returned and/or an accounting of amounts not returned provided, and/or
- Penalties that may be imposed against landlords who do not comply the rules.
Maximum Amount – Just over one-half of states limit the amount of security deposit a landlord can require. In states that specify a maximum, the amount typically varies from one to two times the monthly rent. Some states allow higher amounts for furnished units and/or for waterbeds. Some states specifically do not allow landlords to collect greater amounts by calling the additional amounts cleaning or redecorating deposits or fees or by collecting also a last month’s rent. Some states allow for an additional amount as a pet deposit, while most states do not consider this issue. If the state’s law is not clear on such issues, it is usually safest to consider the maximum as including everything except one month of rent.
Interest – There is a wide variety of specifications for calculating interest among states that require payment of interest on deposit. Some states specify a fixed rate, while others tie the rate to an index. Some states require payment of interest only after a certain length of tenancy, for example, one year.
Depository – While some states allow commingling of security deposits with other funds available for use of the landlord, many do not. Many states specify where deposit funds must be kept. A significant number of states specify the type and/or location of institutions and/or types of accounts in which funds may be deposited. Some states require that information regarding location be provided to the tenant.
Deductions – Most states specify the items for which funds can be deducted from deposits. Most states allow deductions for unpaid rent, damages, and replacement of missing items. Most, perhaps all states prohibit deductions for normal wear and tear.
Return/Accounting – Most states require that landlords return the security deposit and/or provide a detail accounting for any portion not returned. They must do so within a certain period following departure of a tenant, whether the departure was voluntary or non-voluntary. The period varies from 10 days to 60 days among the states, with one state only requiring a “reasonable” period.
Penalties – Many states impose significant financial penalties on landlords who do not perform in accordance with the law if the tenant pursues return of his security deposit in court. Penalties in various states include loss of the right to keep any part of the deposit and double or treble damages payable to the ex-tenant plus court costs and attorney fees.
Security deposits serve the purpose of protection as you turn over your income property asset to your tenant. Make sure that your security deposit adequately protects you from tenant damage or default within the limits of the maximum amount allowed by your state’s law. If you have specific concerns, such as pet damages, consider increasing the amount of security deposit to cover such damages, again with the total being in accordance with the law.
Landlords usually want to charge as much as they legally can, but the reality is that the market will have a direct impact on the amount. Generally the more the tenant has at stake, the more likely he will return the unit in good condition. Additionally, by collecting a larger deposit, the landlord has greater financial protection if the tenant should leave owing rent. However, even when still within allowable statutory limits, if the security deposit is set too high many potential applicants who otherwise might qualify to rent under your standards may not apply because of the higher move-in costs.
Most states limit the amount of security deposit that may be collected to an amount that is equal to one to two month’s rent. The amount may also be modified in some states for various factors such as whether the unit is furnished, the tenancy is month-to-month, or whether the tenant has water filled furniture or a pet.
It is advisable for landlords to always collect some amount of security deposit. The prospective tenant by committing to a security deposit is investing his funds as a return on his future actions. Without requiring some security commitment from the tenant, the tenant may feel no loyalty, no obligation to respect the property and fail to fulfill his responsibilities. The security deposit is a psychological tool that works to the landlord’s advantage.
Sometimes there are extenuating circumstances that require the landlord to allow possession without receiving all funds normally required before possession is given to the tenant. This might be that the landlord has found the perfect tenant but the prospect does not have the full amount required including first month’s rent, the requested security deposit amount, and any other deposits or fees allowed by state law. If you are willing to accept the inherent risk, collect as much money as you can before moving the tenant in.
It is usually best to apply the amount received toward security deposit first, other allowed deposits and fees second, and rent last. This is because it is usually easiest to obtain an eviction for unpaid rent than for the other items. The lease agreement document should be modified or include an addendum that states in detail the terms of deal, including how much is due for each installment payment toward amounts deferred, dates when due, and that failure to make agreed payments is grounds for lease termination.
Last Month’s Rent
A last month’s rent is actually a special type of deposit because the landlord will, by definition, be returning it by accepting it as payment for the final month’s rent. Some states allow collection of a last month’s rent in addition to first month’s rent and a security deposit. Other states consider the collection of any funds above a month’s rent to be a security deposit and regulate the maximum of the total security deposit.
Collecting the last month’s rent as well as the first month and security deposit, assuming that it is allowed by your state’s law, can significantly reduce the pool of applicants because the total of deposits becomes quite large. It can lead to misunderstandings and conflicts if not adequately defined in the lease agreement.
First, the tenant may assume that, since the last month is paid, there is no need to give notice or return property to good condition. Second, there is the issue of whether the tenant owes additional last month’s rent when rents increased during the tenancy. Judges often rule that the last month rent was already collected and that no additional monies can be collected even though the rent near the end of the lease was significantly greater than the amount originally collected as last month’s rent.
Some states designate that such funds labeled as last month’s rent can only be used for that purpose. That would mean that in the case of substantial damage to the unit and the security deposit has been exhausted, that such monies cannot be applied to the cost of damages, so the cost must be obtained separately after the fact, either voluntarily or through a lawsuit. A particular judge may rule this way even when the matter is not determined by statute.
In addition to adequate documentation, making sure that the amount of the security deposit and the amount of the monthly rent are not equal provides an additional argument against any claim by the tenant that he thought the security deposit would cover the last month’s rent.
Pet Deposits
It has been reported that more than half of U.S. renters have pets. Yet, only five percent of rental housing anywhere allows animals. That means that tenants are lying to landlords about having pets when they move in, or acquiring a pet in violation of the lease agreement later. Perhaps it happens because of a seemingly intractable attitude by landlords that pets cost them money so they refuse to even discuss the issue. Either way, landlords and tenants inevitably get into hassles that poison their relationship.
According, since the odds are high that pets will end up in your rental unit anyway, it is often better to voluntarily accept pets and protect yourself by discussing the pets in the lease, collecting a pet deposit, and charging a pet differential. You should also make sure that everything is clear regarding duties and responsibilities associated with pets by having comprehensive clauses in your lease or by separate Pet Agreement.
Although the majority of states do not address pet deposits, there are some states that do. Nebraska, for example, limits the amount of pet deposits to 25 percent of rent. The law does not appear to address the issue of refundable vs. non-refundable or discuss the need for an accounting. However, even Nebraska does not require the landlord to allow pets in his property. Since laws must usually be applied equally to all tenants in a property, Nebraska landlords would likely be required to either ban pets from all units of a particular property or limit the deposit to 25 percent for all units. Since the laws of those few states that do consider pet deposits vary significantly, you must check the laws of your state regarding the issue.