Can a Landlord Keep Part of a Holding Deposit?

comments

Currently3.04/5 Stars
1
2
3
4
5

out of 694 votes

By Robert Griswold

Question: I have a signed and dated receipt and holding deposit agreement from a qualified applicant of $1,000. It states the applicant will pay the remaining balance of one month's rent plus security deposit minus the holding deposit. It also states "the landlord and applicant agree that if applicant cancels or fails to sign rental agreement and pay funds, the landlord may retain the deposit."

The applicant has called to say she lost her job and will not be moving in and she can't afford the higher rent. Can I keep any part of the $1,000 since I know I have to start to advertise again and find another qualified applicant? What are my legal rights regarding this?

Landlord's attorney Smith replies:

You did a good job by having the prospective resident sign a holding deposit agreement. Without a written agreement, the law is unclear as to what deductions are proper. After approval, the applicant did not have the right to cancel the agreement to rent.

The provision in the holding deposit agreement allows you to retain at least a portion of it. You have indicated that your agreement allows you to retain the entire $1,000 holding deposit in the event of cancellation. Some judges could disagree with this and require you to show the court what your actual monetary losses are. Some courts would hold that you can only deduct the daily rental value from the date of cancellation until the premises are successfully re-leased, together with advertising and other costs.

Either way, if you choose to retain the entire $1,000 or your actual losses, if less, provide a written accounting, and, if applicable, any refund, within 21 days of the applicant's cancellation.

Tenant's attorney Kellman replies:

The law disfavors penalties in rental contracts as being improper liquidated damages clauses. Here, you have a clause in your agreement that mandates the tenant to forfeit the entire holding deposit regardless of the damage you may suffer, if any. This is unfair and probably unenforceable even if you want to keep only a part of it. You may try to soften the problem with keeping the money by only keeping a portion of it but that does not make that provision valid. You would arbitrarily choose how much to keep without regard to any pre-agreed standard of how much to keep and under what circumstances. How much is too little or too much? By keeping any money, you risk a claim for that money by the tenants.

There are option-type contracts that keep a unit off the market, pending a possible formation of a contract. Here, the entire option amount may be retained upon the failure to enter into a contract within a given period. Those agreements must be specific and meet certain legal guidelines to be valid. Your agreement does not appear to be one of these.