The Right Way to Handle Your Tenants’ Security Deposit

security depositNew Jersey Security Deposit Law

The next step after reaching agreement with your tenant is handling the security deposit. New Jersey Landlord-Tenant Law requires that the landlord deposits the security in a state or federally chartered institution in New Jersey.

The deposit should be placed in an interest-bearing account. The landlord is required to do this within 30 days of receiving the security deposit and provide notice to the tenant as to where the security is being held and the interest rate earned. You can do this either by a certified letter or in a notice contained in the lease. The landlord is required, during the course of the tenancy, to provide statements to the tenant in reference to the security account on an annual basis. In addition, the landlord either needs to write a check or provide the tenant with a credit towards the rent for the amount of interest earned over the year.

What Happens When Landlords Fail to Handle Security Deposits Correctly

The landlord becomes very vulnerable. The tenant can have the landlord apply his security deposit to the rent.
If the landlord mishandles the security deposit, the tenant can have the security applied to the rent and the landlord cannot ask for additional security from the tenant for the balance of the tenant’s tenure.

What happens if the tenant damages the apartment? What happens if the tenant owes rent when the rental arrangement terminates? The landlord will be totally unprotected and will experience financial loss.

There’s also a practical aspect to this. If the property is sold and the landlord knows where the security deposits are held, the landlord can take the appropriate steps to transfer the property.

This is a bigger problem in commercial transactions than in residential ones. I had a client whose former property manager “took care of” the security deposits. The property manager died. The property manager did not keep good records and the security deposits in question could not be found. The property owner paid security deposits out of his pocket. There is a very important lesson to learn: always set up security deposit accounts.

How to Handle Security Deposit When the Tenant is Ready to Move Out

New Jersey Security Deposit Law has strict regulations as to how to deal with the security deposit when the lease term ends. New Jersey Landlord-Tenant Law requires that the landlord returns the security deposit within 30 days of the end of the rental relationship. The landlord must also provide a detailed accounting of the security deposit. The accounting must state the initial security deposit, any additions to the security deposit during the term, interest earned, and the total amount being held.

The landlord also has to provide a detailed itemized list of all deductions from the security. This includes unpaid rents, rekeying fees, and damage to the premises beyond normal wear and tear. The accounting should also include a check for any net security deposit owed. The accounting needs to be sent to the last known address of the tenant. Sometimes the tenant leaves no forwarding address. If that is the case, the accounting should be sent to the recently vacated unit.

The failure to provide the accounting above, opens the landlord to liability under New Jersey’s Rent Security Act (RSA). The RSA provides for double damages, attorney’s fees, and costs for wrongfully withheld security deposits. While there are some defenses available, it is always best to comply with the RSA to avoid any question.

New Jersey also has a Consumer Fraud Act (CFA). The CFA goes beyond your typical fraud lawsuit by defining consumer fraud as a violation of any New Jersey law or regulation or misrepresentation in a consumer transaction. The New Jersey Supreme Court determined that Consumer Fraud Act (CFA) applies to rental transactions. The CFA provides for treble damages in the event the landlord mishandles the security deposit. That means that the court can award triple the tenant’s compensation for damages and attorney’s fees. A savvy tenant lawyer will know how to apply this law to any situation presented. You need to be one step ahead of that savvy lawyer.

I recently had one client who was being sued for violating the RSA. The defense of the matter was not helped by certain ambiguities in the lease. Thorough knowledge and research of the Rent Security Act and its application, allowed me to avoid my client having to pay serious damages to the tenant. Careful thorough examination of the situation allows landlords to avoid problems with the statutes.