Protect Yourself When Letting Tenants Tap Security Deposit to Pay Rent

The tenant security deposit is the piggy bank that you don’t want to break open while the lease remains in effect, unless it’s absolutely, positively necessary. And with COVID-19 cases resurging and the prospects of business shutdowns looming, we may be getting close to that absolutely, positively necessary point.

The tenant security deposit is the piggy bank that you don’t want to break open while the lease remains in effect, unless it’s absolutely, positively necessary. And with COVID-19 cases resurging and the prospects of business shutdowns looming, we may be getting close to that absolutely, positively necessary point.

As many landlords learned during the first wave of the COVID-19 outbreak in spring, applying cash from the security deposit to some or all of a tenant’s unpaid rent is one of the things you can do to ride out the crisis until things get back to some semblance of normal. But if you do opt for the security deposit solution, make sure you get the tenant to give you the appropriate legal protections. Here’s how to do that.  

The Legal Situation

The legal game plan is to ensure the tenant repays the security deposit drawdown amount as soon as reasonably possible and preserve your remedies in case it doesn’t. Hopefully, the below provisions for accomplishing these objectives are already in your current lease. If not, you may have to negotiate an amendment setting out new rules regarding the security deposit. In either situation, there are six protections a landlord needs. We’ll review those protections and give you a Model Lease Clause: Spell Out Tenant’s Duty to Replenish Security Deposit that incorporates them, which you can adapt and use in your leases.

1. Tenant Duty to Replenish

Make sure the lease or lease amendment requires the tenant to replenish all of the money you draw from the security deposit to cover the unpaid rent [Clause, par. a].

2. Replenishment Amount

Rather than simply restoring the security deposit to the original amount, landlords may want to ask the tenant to pay additional funds as consideration for allowing it to use the security deposit to pay rent [Clause, par. a].

3. Replenishment Date

Demanding immediate replenishment defeats the purpose of allowing a cash-starved tenant to use the security deposit to pay rent. By the same token, the longer the security deposit remains in a reduced state, the greater the landlord’s risks. So, the sides will have to meet somewhere in the middle so that the tenant gets the time it needs to repay without unduly exposing the landlord to peril during these times of great financial uncertainty. One possibility is to allow the tenant to replenish the security deposits in installments over time [Clause, par. a].   

4. Failure to Pay Is Material Default

To ensure recourse to all necessary lease remedies, make it clear that the tenant’s failure to repay the depleted security deposit amount on time constitutes a material default under the lease [Clause, par. b].

5. Repayments Are “Additional Rent”

Make it clear that repayments constitute “additional rent” so you can charge late fees, interest, and delinquency services charges. This advice comes directly from a New York attorney who was involved in a case where a tenant made a substantial drawdown of its security deposit to pay rent and didn’t replenish the proceeds on time. The landlord charged the tenant late fees, interest, and services charges, but the tenant claimed it didn’t have to pay them because the replenishment payment wasn’t “additional rent.” “A clarification to the late fees and interest clause stating that these charges apply to an unpaid security deposit supplement would have done a lot to prevent this dispute,” the attorney relates [Clause, par. b].

6. Landlord Retains Other Remedies

Specify that exercising your right to charge the tenant late fees, interest, and delinquency services charges is a supplement rather than a substitute to your other lease and legal rights and remedies. Also clarify that in exercising those rights, you are in no way extending the deadline due date for the tenant to replenish the security deposit [Clause, par. c]. 

Topics