ETHICAL USE OF THE TENANT HOLDING DEPOSIT

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Many landlords collect an application fee or holding deposit from prospects at the time they submit their application and authorize the credit check.This deposit is a form of earnest money, assuring the prospect is serious about moving in and that the landlord is not wasting his time.At the same time, it assures the prospect that he is under serious consideration and that if he qualifies the landlord will rent him the property, usually on an agreed date.The deposit should always be covered by a written agreement for its payment and use, which complies with State and local law.All States with significant populations of renters now have some sort of legal regulation on the amount of the deposit which can be charged, or its use, or both, and many local governments have enacted ordinances in the same vein.For this reason it is not really practical to go over all the legal requirements under which the landlords in the thousands of counties and tens of thousands of cities in the United States must operate, or to offer a form agreement which would be useful nation-wide.This column is confined to the ethical use of the deposit, a question which arises once the legal requirements are fulfilled.The local apartment association would be a good starting point for the landlord seeking a form agreement he can use in his area.

The purpose of the deposit, from the landlord's point of view, is three fold:first, to assure the applicant is serious, second, to cover the cost of the screening report if the applicant fails to qualify or does not rent as agreed, third, to reimburse for loss if the property is held off the market but the applicant fails to sign a rental agreement.The overall object is to fulfill these purposes without triggering a small claims action by the tenant if he is rejected, and winning it if that occurs.

The first purpose of the deposit is to assure that the applicant is serious.This purpose is fulfilled when it is paid.The primary consideration here is that this frame of mind works both ways.Just as the landlord will feel that he has a tenant if the applicant qualifies, so will the applicant feel that he has a landlord if he qualifies.The holding deposit, perhaps as much as $200 or more, together with the sense of entitlement which it will excite in the applicant, may well deter further apartment hunting.For this reason, the collection of more than one deposit from more than one applicant for the same unit is not recommended.It is manifestly unfair to collect a deposit from an someone, letting him think he is seriously in the running, when there are three other applicants ahead of him.Nor is there any reason to do so, as none of the purposes of the deposit is served thereby.A landlord in this situation would be well advised to accept subsequent applications with the understanding that if the applicant ahead falls through, then the holding deposit can be submitted, perhaps through a check submitted but not deposited until authorized by phone.

The second purpose of the deposit is to cover the cost of the screening.Since the cost of this service is known in advance, it should be clearly disclosed in the deposit agreement.Most landlords agree to credit this amount to the first month rent if the applicant is accepted, but to retain it if the applicant is rejected or refuses the unit.The inclusion of such a provision encourages the applicant to sign up if he qualifies, and reinforces his feeling of having an interest in the unit, while making it clear to him that he will be out some money if he is just taking a wild stab and doubts that he will qualify for a tenancy.

The third purpose of the deposit is to cover the losses incurred in holding a unit off the market while the application process is carried out.This last purpose is the most delicate of the three.There are two reasons for this:

1.The mere fact that the unit was not rented to the applicant does not confer a legal right on the landlord to recover money, and

2.The amount of loss is extremely difficult precisely to ascertain, and even the fact of loss may be so.

To suggest that denial of the application gives rise to a right to keep a part of the deposit for holding the property off of the market is to suggest that the applicant is under a duty to warrant that he will qualify under the landlord's screening standards.These are standards which, for good reasons, probably will not even be disclosed to the applicant in advance.There is no such legal duty of which we are aware.To place him under a contractual duty to do so in the application is to ask him to bet that he will qualify, which most sane applicants will refuse to do.There is no difficulty, however, with placing the applicant under a contractual obligation to execute a rental agreement within a certain number of days of approval, and recover against the deposit if the applicant fails to do so.This seems a sound policy for recovery of damages against the deposit.

The second issue, the measure of recovery, must also be addressed.In order to recover damages for failure to follow through with the rental agreement a landlord would have to show that the applicant was under an obligation to rent the premises upon approval, that he failed to do so, that the property was kept off the market to give him an opportunity to do so, that at least one other applicant who was qualified and would have rented the unit was lost as a result, and that a certain number of days rent were, therefore, lost.Clearly it is impossible to prove this.It is also clear that some loss has occurred.

Under these circumstances, the parties can agree in advance that a fixed amount be withheld from the deposit as "liquidated damages."Liquidated damages have been much litigated in all jurisdictions and are the subject of many statutes.A landlord contemplating this policy should obtain legal counsel who can advise on the requirements of the jurisdiction involved.For the landlord with one or two units for which he must screen tenants once every three or four years, establishment of a liquidated damages policy is probably not worth the effort.

Much of this, however, is rendered moot by the market.Regardless of the legalities, the landlord must decide whether his policy makes sense in light of the market and the type of rental unit which the landlord is offering.

Once the landlord has accepted an application and holding deposit, he should not accept subsequent holding deposits, as discussed above.This does not mean that he should refuse subsequent applications.The screening should be concluded within a couple of days.Applications received during this time should be taken with the understanding that they will be considered only if the one pending is declined.At that time the subsequent applicant will be contacted and asked to pay his deposit.

The landlord should follow these steps in establishing his application fee/holding deposit policy:

1.Ensure all local legal requirements are being followed.

2.Set an amount which is both legal and realistic in light of the market and the unit being offered.

3.Withhold from the non-qualifying applicant only those amounts sufficient to cover the cost of the screening process, and disclose them in advance, if possible.

4.Credit the successful applicant the cost of the screening.

5.Withhold other amounts only after careful consideration, and as to applicants who have been approved but failed to rent the unit.

6.Do not hold multiple deposits at the same time for the same unit.

A holding deposit policy which results in frequent small claims litigation and the scrutiny of the local consumer fraud unit is a failure.By adopting ethical policies, without over reaching, the landlord can achieve the purposes of the deposit without these problems.

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