Security deposits – Who’s got the tenant’s dough?

I don’t know if it is a side effect of the economic downturn, or just part of the normal cycle of events, but recently we have had a spate of questions about property managers holding (or not holding) security deposits. A few weeks ago, I discussed the amount of a security deposit; now it’s time to examine who can hold the money. 

The first, and probably most important, thing to keep in mind when considering what to do with security deposits is to remember it’s not your money! A security deposit remains the tenant’s money until some event triggers transferring the money from the tenant to the landlord. Usually, that triggering event is either the natural ending of the lease or a termination because of a breach of the lease. But who has to hold the money and where? The immediate answer is easy . . . it depends!

Some of the questions we hear include: Can the landlord hold the security deposit, or are you, as the licensee, required to hold the money? Are there any restrictions on where the money has to be deposited? Is the tenant entitled to earn interest on their security deposit? Usually when we are examining the rights and responsibilities of parties to a contract, we look to the contract. In this instance, the contract would be either a property management contract or, if using a standard PAR form, the Listing for Rent, Exclusive Right to Rent Real Property Form (XLR). As with any transaction, the principal (in this case the owner/landlord) has the right to hold the security deposit. If you are managing enough properties, you will probably have consulted with your own attorney and have prepared a customized property management contract to cover all of the intricacies of your relationship with your landlord(s), and this responsibility will be delineated in that agreement. If you are using the PAR standard form XLR, this responsibility is delegated via paragraph 15. Paragraph 15 identifies that either the broker will keep the security deposit (15A) or the owner/landlord will keep the security deposit (15B). Pretty straight forward, right?

While this form does provide some guidance, brokers need to also be familiar with the escrow requirements set forth under the State Real Estate Commission’s Rules and Regulations.  Section 35.321 requires a broker to “deposit money that the broker receives belonging to another into an escrow account in a Federally or State-insured bank or depository to be held pending consummation of the transaction or a prior termination thereof that does not involve a dispute between the parties to the transaction, at which time the broker shall pay over the full amount to the party entitled to receive it.”  This means that when a tenant gives you (the property manager) the security deposit, you have to deposit it into your escrow account. Incidentally, if your office handles both rentals and sales, your office should (though it is not required to) have an escrow account exclusively for the rental properties it manages. If the owner/landlord is going to keep the security deposit, make sure you are not asked to collect it. Under the Rules and Regulations, once you “receive” money “belonging to another” you are obligated to deposit the money into your escrow account! Either the landlord should collect the money directly from the tenant or the tenant should mail the security deposit directly to the landlord.

The Landlord and Tenant Act of 1951 adds its own set of requirements to security deposits. For example, when more than $100 is collected as security, it must be deposited into an escrow account “of an institution regulated by the Federal Reserve Board, the Federal Home Loan Bank Board, Comptroller of the Currency, or the Pennsylvania Department of Banking.” The tenants are entitled to a written notice of the name and address of the financial institution where the money is deposited, and the amount that was deposited. Additionally, if the security deposit is held for more than two years, it must be placed in an interest-bearing account (though no minimum amount of interest is required). A fee equal to one percent per annum of the security money may be charged for administrative and custodial expenses. Any money over and above the one percent is the tenant’s money, and is to be returned to the tenant on the anniversary date of the lease.