There is a tend that I have noticed from reviewing rental agreements and dealing with landlords, and that trend is: landlords have no clue about security deposits. Really, NONE! I use to like to inquire about security deposits somewhere in the middle of an initial consultation. Now, I save that question for the end, and I assume that that it was not handled correctly. Why this cannot be handled correctly puzzles me. I do not know if this is a lack of understanding or a complete disregard for the law. This article will discuss how a security deposit should be handled and what the repercussion for not following the law is. This should get you thinking more about security deposits.
In the eyes of the law, the security deposit is the tenant’s money. The purpose of the money is not to better the landlord. The purpose of the money is to protect the landlord in case the tenant causes damage to the apartment or leaves the apartment owing money. This means that a landlord cannot simply put this money into his/her personal checking account.
If a landlord takes a security deposit, there are several obligations that he/she satisfy. A landlord must: provide to the tenant a written receipt that describes the condition of the apartment; hold the security deposit in a bank account that is separate from the landlord’s money; pay the tenant interest every year on the security deposit; and, keep records of deposits and repairs that are made to the apartment.
And, there is more. Each of the above mentioned obligations has its own nuance. For example, not only must the security deposit go into a separate checking account, it must go into a Massachusetts account that designates the funds as something other than a personal account. The account registration must state that the money is for the the benefit of someone else. Also, in the landlord must provide to the tenant the location of the bank, name of the bank, and provide the tenant with the account number (yes, the account number). I will not get into each nuance, there are plenty of resources online that walk you through each. However, the second most over looked is the fact that interest must be paid.
If you violate the law and do not, for example, put the money into a bank account separate from your own personal money, if you do not give a complete written receipt to the tenant, or you do not allow the tenant to inspect the records you are required to keep, the tenant can demand the money back. Then, if you do not give the money back after a lawful demand, you can be liable for three times the security deposit to the tenant.
Remember, Massachusetts is a very tenant oriented state. If there is the slightest deviation from what the law requires, a court is likely to favor the tenant. This does not mean that there has to be an intentional oversight. This means that any oversight, intentional or not, a court is likely to favor the tenant. With that said, there are a lot of sources available online that discusses each of the requirements in depth. This article was designed to get you thinking about what a security deposit is and what it should be used for. If you intend on collecting a security deposit from a tenant, you are encouraged to throughly read through the requirements, you would not want a tenant to take advantage of the situation. In addition, if you are not willing to follow the law on security deposits and would like to limit any potential liability for a beach of duty, simply do not take a security deposit. Spend some additional time screening your tenants and it will be money saved and an aggravation avoided.
It is funny how such a simple thing can be such a headache. If you think about it, a security deposit is just suppose to be money that is put aside for any damage that the tenant may cause. Everyone knows that. But with such a stringent rule, it shows what a tenant oriented state this is.