What is an application deposit? How is that different from an application fee?
An application deposit and an application fee may be required by a landlord.
Application fees are required by some landlords to cover the cost of tenant screenings such as credit and background checks. Landlord-tenant statutes of each state may address the issue of application fees differently. As allowed by statute, many landlords do charge an application fee. Some states set a maximum fee amount while other states limit the fee amount to actual out of pocket costs as charged by the tenant screening services provider. In a few states there is no stated limit on application fees. Application fees are paid at the time of application submission and are generally nonrefundable.
An application deposit is also known as a holding deposit. An application deposit is a deposit paid to the landlord by the applicant at time of application to request the landlord hold the rental unit for the applicant until the processing of his application has been completed. The prospective tenant is giving assurance to the landlord that he, the tenant, is serious in his interest in the unit and intends to sign the lease upon his approval as a tenant. When the landlord holds the rental unit for an applicant, the unit is taken off the market and unavailable to other qualified prospective tenants who may have to be turned away. The holding deposit is meant to compensate the landlord for damages suffered as a result of withholding the unit from the rental market in the event that the applicant fails to meet screening qualifications or rescinds his agreement to rent the unit.
An application deposit is not a security deposit. At the time of application there is no signed lease agreement between a landlord and prospective tenant. Since the applicant is not a tenant the state’s security deposit rules are not applicable.
Although holding deposits may be allowed in most states, they can often lead to misunderstandings or legal actions by either party. The problem is that usually most states do not cover the subject adequately in their statutes, and it is usually 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 for move-in, or simply changes his mind about wanting the unit.
Some states that cover holding deposits by explicit 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 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 of the agreement and provides a receipt for the amount.
For the landlord’s protection, and to avoid major problems, a landlord should prepare a written holding deposit agreement in accordance with 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”, not a security deposit,
- The amount of the deposit,
- The length of time (including exact ending date) the landlord is willing to hold the rental unit off the market,
- The basic terms of the lease agreement and the conditions under which the landlord will rent the unit to the applicant – i.e., satisfactorily meeting rental standards and full payment of required fees and deposits by the end of the holding period term,
- What will happen to the holding deposit if the applicant signs a lease agreement – generally, the full holding deposit will be credited to the security deposit at lease signing,
- What will happen if the applicant decides not to rent the unit before being notified whether his 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 to the applicant, and
- What will happen to the holding deposit if the applicant defaults on the holding agreement – specifically, how much of the deposit the landlord will retain, and when and how the portion not being retained by the landlord will be returned to the applicant.