Holding Deposits
Holding Deposits
Sometimes, when the rental market is tight, applicants may offer a holding deposit to take the rental unit off the market until the applicant’s screening and verification is complete. Other times, a holding deposit may seem appropriate when an applicant appears committed to the rental, but must make arrangements for the move-in funds. The holding deposit is not a security deposit, but is to compensate the landlord for damages suffered for holding a unit off the market in the event that the applicant fails to meet screening qualifications or rescinds his/her agreement to rent the unit.
It is best to avoid the use of holding deposits, particularly now that most verifications of qualification can usually be done within a relatively short time utilizing today’s technology. Although holding deposits may be legal in your state, they often lead to misunderstandings or even legal hassles. A major problem is that most states do not cover the subject adequately, if at all, and it is often 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 or simply changes his mind about wanting the unit.
Some states that cover holding deposits by 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 perhaps a reasonable charge for the time related to paper work and inconvenience to the landlord, but 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 and provides a receipt for the amount.
Although holding deposits are best avoided, sometimes they are helpful because of market conditions. If allowed by your state, it might be better to utilize a holding deposit rather than lower qualifying standards or reduce the rent. For the landlord’s protection, holding deposits should always be in cash, cashier’s check, or money order and for the protection of both parties there should always be a written agreement detailing the conditions related to the deposit even if not required by law.
When the landlord holds the rental unit for an applicant, it should be considered off the market and unavailable to other qualified prospective tenants who may have to be turned away. If the applicant later changes his/her mind, the landlord may have suffered financial harm. In such a case, the landlord is justified in retaining all or part of the holding deposit within the limits allowed by state law. However, be sure that this scenario is discussed in a signed agreement.
The amount of the holding deposit should be reasonably related to the rent of the unit and should take into account the potential inability of some applicants to immediately put up significant deposit funds in addition to application and/or screening fees.
The written holding deposit agreement should be in accordance with any applicable state law and unambiguously cover the following issues:
- The address of the rental unit,
- The names of landlord and applicant,
- The amount of the deposit,
- The length of time (including exact ending date) the landlord is willing to hold the rental, taking into account the size of the deposit and other qualifying information,
- The basic terms of the lease agreement,
- The conditions under which the landlord will rent the unit to the applicant – e.g., verification of identity, a fully completed application form, satisfactory results on all applicable screening reports, verification of employment, and full payment of the security deposit and first month’s rent by the end of the holding period,
- What will happen to the deposit if the applicant signs a lease agreement – usually, that the full holding deposit will be credited to the security deposit,
- What will happen if the applicant decides not to rent the unit before being notified whether or not his/her 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 if the failure is evident within a couple of days after the landlord has accepted the holding deposit, and
- What will happen to the holding deposit if the applicant defaults on the holding agreement – specifically, how much the landlord will retain, this being in accordance with any applicable state law, and when and how the portion not being retained by the landlord will be returned to the applicant.
Possible clauses in the agreement might be written as follows:
- After the applicant has been notified that he/she has been approved to rent the unit and the applicant fails to complete the rental transaction for whatever reason, then the amount of damages to be deducted from his/her holding deposit shall be $________ per day from the date he/she agreed to rent the unit (the day the unit was taken off the market) until the day he/she gives notice of his/her rescission plus an equal number of additional days to compensate for lost marketing time and additional advertising expenses incurred.
- If the landlord’s damages exceed the amount of the holding deposit, then applicant agrees to pay the difference, to a maximum amount of $________, within _____ calendar days of request.
- In the event the landlord re-rents the unit within the time frame for which deductions have been made from the holding deposit, then the applicant should be credited an amount equal to the daily rent stated above for each day that rent was collected for the unit, with when and how the portion not being retained by the landlord will be returned to the applicant.
In summary, landlords and agents must follow any laws of their states and they should use good judgment and be fair in their holding deposit policy. An applicant whose holding deposit is retained without adequate justification may well have a cause of action for damages against the landlord which can result in more time and expense than the deposit was worth.