ETHICAL
USE OF THE TENANT HOLDING DEPOSIT
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Many
landlords collect an application fee or holding deposit from prospects at the
time they submit their application and authorize the credit check.
This deposit is a form of earnest money, assuring the prospect is serious
about moving in and that the landlord is not wasting his time.
At the same time, it assures the prospect that he is under serious
consideration and that if he qualifies the landlord will rent him the property,
usually on an agreed date. The
deposit should always be covered by a written agreement for its payment and use,
which complies with State and local law.
All
States with significant populations of renters now have some sort of legal
regulation on the amount of the deposit which can be charged, or its use, or
both, and many local governments have enacted ordinances in the same vein. For this reason it is not really practical to go over all the
legal requirements under which the landlords in the thousands of counties and
tens of thousands of cities in the United States must operate, or to offer a
form agreement which would be useful nation-wide. This column is confined to the ethical use of the deposit, a
question which arises once the legal requirements are fulfilled.
The local apartment association would be a good starting point for the
landlord seeking a form agreement he can use in his area.
The purpose of the deposit, from the landlord's point of view, is three
fold: first, to assure the
applicant is serious, second, to cover the cost of the screening report if the
applicant fails to qualify or does not rent as agreed, third, to reimburse for
loss if the property is held off the market but the applicant fails to sign a
rental agreement. The overall object is to fulfill these purposes without
triggering a small claims action by the tenant if he is rejected, and winning it
if that occurs.
The first purpose of the deposit is to assure that the applicant is
serious. This purpose is fulfilled
when it is paid. The primary consideration here is that this frame of mind
works both ways. Just as the
landlord will feel that he has a tenant if the applicant qualifies, so will the
applicant feel that he has a landlord if he qualifies.
The holding deposit, perhaps as much as $200 or more, together with the
sense of entitlement which it will excite in the applicant, may well deter
further apartment hunting. For this
reason, the collection of more than one deposit from more than one applicant for
the same unit is not recommended. It
is manifestly unfair to collect a deposit from an someone, letting him think he
is seriously in the running, when there are three other applicants ahead of him.
Nor is there any reason to do so, as none of the purposes of the deposit
is served thereby. A landlord in
this situation would be well advised to accept subsequent applications with the
understanding that if the applicant ahead falls through, then the holding
deposit can be submitted, perhaps through a check submitted but not deposited
until authorized by phone.
The second purpose of the deposit is to cover the cost of the screening.
Since the cost of this service is known in advance, it should be clearly
disclosed in the deposit agreement. Most
landlords agree to credit this amount to the first month rent if the applicant
is accepted, but to retain it if the applicant is rejected or refuses the unit.
The inclusion of such a provision encourages the applicant to sign up if
he qualifies, and reinforces his feeling of having an interest in the unit,
while making it clear to him that he will be out some money if he is just taking
a wild stab and doubts that he will qualify for a tenancy.
The third purpose of the deposit is to cover the losses incurred in
holding a unit off the market while the application process is carried out.
This last purpose is the most delicate of the three.
There are two reasons for this:
1.
The mere fact that the
unit was not rented to the applicant does not confer a legal right on the
landlord to recover money, and
2.
The amount of loss is
extremely difficult precisely to ascertain, and even the fact of loss may be so.
To suggest that denial of the application gives rise to a right to keep a
part of the deposit for holding the property off of the market is to suggest
that the applicant is under a duty to warrant that he will qualify under the
landlord's screening standards. These
are standards which, for good reasons, probably will not even be disclosed to
the applicant in advance. There is
no such legal duty of which we are aware.
To
place him under a contractual duty to do so in the application is to ask him to
bet that he will qualify, which most sane applicants will refuse to do.
There is no difficulty, however, with placing the applicant under a
contractual obligation to execute a rental agreement within a certain number of
days of approval, and recover against the deposit if the applicant fails to do
so. This seems a sound policy for
recovery of damages against the deposit.
The second issue, the measure of recovery, must also be addressed.
In order to recover damages for failure to follow through with the rental
agreement a landlord would have to show that the applicant was under an
obligation to rent the premises upon approval, that he failed to do so, that the
property was kept off the market to give him an opportunity to do so, that at
least one other applicant who was qualified and would have rented the unit was
lost as a result, and that a certain number of days rent were, therefore, lost.
Clearly it is impossible to prove this.
It is also clear that some loss has occurred.
Under these circumstances, the parties can agree in advance that a fixed
amount be withheld from the deposit as "liquidated damages."
Liquidated damages have been much litigated in all jurisdictions and are
the subject of many statutes. A
landlord contemplating this policy should obtain legal counsel who can advise on
the requirements of the jurisdiction involved. For the landlord with one or two units for which he must
screen tenants once every three or four years, establishment of a liquidated
damages policy is probably not worth the effort.
Much of this, however, is rendered moot by the market.
Regardless of the legalities, the landlord must decide whether his policy
makes sense in light of the market and the type of rental unit which the
landlord is offering.
Once the landlord has accepted an application and holding deposit, he
should not accept subsequent holding deposits, as discussed above.
This does not mean that he should refuse subsequent applications.
The screening should be concluded within a couple of days.
Applications received during this time should be taken with the
understanding that they will be considered only if the one pending is declined. At that time the subsequent applicant will be contacted and
asked to pay his deposit.
The landlord should follow these steps in establishing his application
fee/holding deposit policy:
1.
Ensure all local legal
requirements are being followed.
2.
Set an amount which is both
legal and realistic in light of the market and the unit being offered.
3.
Withhold from the
non-qualifying applicant only those amounts sufficient to cover the cost of the
screening process, and disclose them in advance, if possible.
4.
Credit the successful
applicant the cost of the screening.
5.
Withhold other amounts only
after careful consideration, and as to applicants who have been approved but
failed to rent the unit.
6.
Do not hold multiple
deposits at the same time for the same unit.
A holding deposit policy which results in frequent small claims
litigation and the scrutiny of the local consumer fraud unit is a failure.
By adopting ethical policies, without over reaching, the landlord can
achieve the purposes of the deposit without these problems.
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