Rental Security Deposit

Paying a security deposit is acceptable practice in any rental situation.

The question is, what is permissible by law in your state or country. It may be anything from one to two month's rent or may not have any limit at all, save that which is the market related norm in your area.

On top of the security deposit, a landlord may demand a pet deposit, cleaning deposit or move-in deposit - all of which may also be governed by law.

A first month's rent is standard and the last month's rent may also be payable in advance. Added to that may be possible brokerage fees, so the tenant may be faced with quite substantial costs when renting a property.

It is quite understandable for a landlord to want to protect himself against possible damages by demanding the highest security deposit allowed by law, or that he thinks he can reasonably charge. Landlords can face stiff penalties if they overcharge: up to three times the amount overcharged plus reasonable attorney's fees.

Both landlords and tenants can best protect themselves if they are knowledgeable of the particular laws in their area. In many states it is a duty of the landlord to inform the tenant of his rights!

However, as much as landlords have obligations to their tenants, the reverse is also true!

Most often disputes arise at the end of the lease agreement, when a refund of the security deposit is due. Simple steps can be followed to ensure that both parties comply with legal requirements.

Before payment of the security deposit:

The tenant should be quite sure that he does indeed want to rent a particular property before paying a reservation fee. Obvious repairs that must be carried out or cleaning required must be pointed out to the landlord and his agreement to remedy must be obtained in writing.

Upon payment of the security deposit:

The landlord must issue a Security Deposit Receipt to the tenant, if acknowledgement of receipt of the deposit is not part of the written lease agreement.

If required, the receipt should state that the rental deposit will be held in escrow, supply details of the escrow account and at what rate interest will be accrued.

The landlord should notify the tenant of his duty to supply a forwarding address within a specified time of moving out, to which a list of damages can be sent and that failure to supply a forwarding address may absolve the landlord from sending such a list.

The landlord can further protect himself by sending a list of damages to the tenant's next of kin or employer, if no forwarding address was supplied. The landlord should notify the tenant that he has the right to be present at the final inspection upon moving out.

Before moving in:

Tenant and landlord must do a walk-through inspection and record the condition of carpets, cupboards, light fittings, wall paper etc. It is advisable for both tenant and landlord to take photographs to keep as record, should a dispute arise.

If the property is being let through a broker or rental agent, they should offer this service. Having an impartial third party doing the inspection (before and after) is always a good idea.

After moving in:

The tenant can be given a specified number of days to either amend the initial checklist, or to notify the landlord in writing of any further defects which were not noticed or recorded during the initial inspection.

The landlord may be obliged to notify the tenant of his right to request a list of existing damages from the landlord, the fact that the request must be in writing and the time allowed to request such a list.

Upon moving out:

The landlord may be required to notify the tenant in writing of the final inspection date and inform the tenant of his right to be present.

After moving out:

The landlord must supply a list of damages and costs incurred to repair these damages to the tenant.

The landlord must refund the security deposit, plus interest earned (if applicable in your area), less damages claimed, within the prescribed period by law. If you've kept proper record of the payments of the tenant, you may be able to offset late payment penalties against the interest earned - if you did not enforce or collect such penalty amounts at the time. Good practice is always to inform the tenant in writing of your intent to do so and to keep a copy of your notice.

Costs that can NOT be deducted from the security deposit:

Normal wear and tear! Although this can become quite a gray area, it is quite reasonable to expect a landlord to repaint or to replace carpets at his cost from time to time. However, a landlord may claim that he had to repaint because of yellowing of paint due to smoking, which may then turn into a dispute.

Costs that CAN be deducted from the security deposit:

• Actual damages to the property beyond normal wear and tear.
• Extensive cleaning required.
• Unpaid rent.
• Unpaid utilities.
• Storage fees.
• Breach of the lease agreement.

Note: Sample lease agreements and other landlord forms can be found on our Real Estate Contract Forms page.

If the landlord finds a replacement tenant, he can only claim for the days during which the apartment was not rented and for the costs associated with finding a replacement tenant. The landlord must be seen to make prompt effort to secure another tenant for his property.

A security deposit is there for the sole benefit of the landlord to protect himself against possible damages. A landlord acting in good faith when administering deposits will not find himself in lawsuits where he may be faced with hefty penalties.

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