Last Month’s Rent
Typically landlords require a new tenant to pay the first month’s rent and a security deposit at the time of move-in. Some landlords also collect the last month’s rent as well. Whether the practice of collecting last month’s rent is a good business practice may depend upon the landlord’s business necessity and/or market conditions. Whether that practice is even permissible for the state and local jurisdiction of his property must first be determined by the landlord.
In some states the last month’s rent is regarded as part of the security deposit. Including the last month’s rent as part of the security deposit may place restrictions on the amount, use, and accounting of the security deposit.
The purpose of a security deposit is to protect the landlord from financial damage caused by a tenant. Specifically a landlord may only recover funds from a tenant’s security deposit if the tenant has defaulted on his obligation to pay rent (owes past due rents) and/or the tenant has caused physical damage to the property that is beyond normal wear and tear allowed by statute. Last month’s rent is exactly that, the amount of money equal to one month’s rent. The money is to be used as payment of rent during the last month of tenancy.
The landlord views the security deposit and last month rent as two different types of money collections that offer financial protections against tenant defaults. However when the amount of the tenant’s security deposit is exactly the same amount as the tenant’s monthly rent, it can cause tenant confusion, misunderstandings, or conflict when the tenant is ready to move-out.
As noted above, due diligence is required to understand how state statutes address issues of deposits and rents. Some landlords mistakenly believe that last month rent can be used in the same manner as the security deposit – that is, to cover unpaid rent and property damages. If the last month’s rent is collected and designated as the last month’s rent, the landlord is limited in his use of the funds. The last month rent amount cannot be used for any other purpose other than last month’s rent.
Some tenants mistakenly believe that their security deposit can be used automatically for the last month’s rent. The landlord’s lease agreement terms and conditions should address in detail all issues regarding rents and deposits, and move-in/move-out policies and practices.
The total amount of funds to be collected must be researched. Most states limit the amount of security deposit that may be collected to an amount that is equal to one to two months’ rent. In those states that regard the last month rent as part of the security deposit, the total deposit amount that a landlord could collect would need to be split between the security deposit and the last month rent amount.
The landlord has a business decision to make regarding rents and deposits as financial protections against tenant defaults and damages. As applicable to statutes and ordinances, should the landlord have a policy of collecting the last month’s rent at lease signing? It depends.
Collecting first and last months’ rent plus a security deposit is a significant amount of money. A landlord could feel fairly confident that he has protected his business as best he can from known risks. On the other hand a tenant after paying a significant amount of money upfront may feel that he doesn’t have to be too concerned about upkeep and move-out since they’re already paid for.
If the landlord only collects the first month rent and a security deposit, the landlord has the risk that the tenant will ride down his security deposit as the last month rent. The landlord will not have the security deposit to cover any property damage and will need to file a lawsuit against the tenant to recover monies advanced for property repairs.
There are other considerations. It can get complicated if the landlord does not have good attention to detail and utilize an adequate property management tracking system.
The last month’s rent is a prepayment of rent. If the tenant has a multi-year lease agreement or renews for several years, there must be a proper paper trail that documents the original agreement and payment. A landlord or tenant could misremember or even forget that the payment was collected.
If the present landlord arranges a sale of the property during the tenant’s residency, the landlord is responsible to provide the buyer with all the paperwork and funds accounting for the current tenants. If the current landlord does not provide complete documentation, the buyer and the tenant in residence will have a conflict at the tenant’s date of move out.
If the landlord collects the last month’s rent and the tenant renews his lease, but with a rent increase, the last month’s rent amount will not cover the rent amount in effect at the time of the tenant’s move-out. As example if the move-in rent was $1000 a month, the collection of the last month’s rent was $1000, but rent was increased to $1200 during the renewal year, at move-out, the landlord will probably be out the difference of $200. In most cases, the tenant will not be liable. Could the landlord have asked for an increase in the last month’s rent amount at the time of rent increase? In most states, unless adequately covered in the lease agreement, the landlord and tenant would have had to agree to the rent increase and increase of last month rent at the same time the rent increase went into effect rather than after.
If the landlord asks for first and last months’ rent and security deposit, many tenants will not have the money to move-in. A landlord can narrow the potential renter pool by having such requirements. A consideration also is whether the competition has such a requirement. If a potential tenant has a choice of similar rental properties, but one is more affordable, a landlord having the requirement may find it more difficult to fill his vacancy. There are also some potential tenants who will choose not apply for a vacancy even though they would have the financial resources to do so.
In some states a landlord may be required to pay interest on tenant funds held by the landlord as the last month’s rent. This requires additional paperwork and accounting on the landlord’s part.
Whether the landlord’s decision is to collect the last month’s rent or not, the landlord’s lease agreement should address how the security deposit cannot be used. As example a lease clause may state “Tenant may not without Landlord’s prior written consent apply the security deposit to the last month’s rent or to any other amounts due by this Agreement. The landlord should clearly communicate this term and condition to the tenant during orientation.
Despite the restriction of the lease clause, the landlord may receive a request from the tenant to use the tenant’s security deposit as the tenant’s last month’s rent. The landlord must decide whether he can afford to take a risk and allow the tenant to use the security deposit for the last month’s rent.
The risk that the landlord may incur is that there may be property damage when the tenant moves out and the landlord will not have any deposit to apply to repairs or cleaning. The landlord will have to absorb the costs or take legal action against the tenant to recover the costs.
The landlord could decide to grant the tenant’s request conditionally. If the tenant has been a good tenant and there is reason to believe the tenant will leave the rental unit clean and in good condition, the landlord may, after a quick property inspection, allow the tenant to use the security deposit for the last month’s rent.
Despite having options, most landlords choose not to collect a last month’s rent. To those landlords, a better business practice is to collect the maximum security deposit allowed by state statute. If the statute allows collecting more than one month’s rent as the security deposit, the landlord would be covered if the tenant skips paying the last month rent. The landlord could apply as necessary excess funds to cover any property damage or cleaning. The landlord would need to file legal action against the tenant if the damages exceeded available funds.