Charging last month’s rent in advance: Your questions, answered

This article addresses questions posted to Superior Court Weighs in on Landlord’s Charging Last Month’s Rent in Advance, published last month on JustListed.

Before addressing your questions, let’s explore the court’s role, as it will help us to understand its ruling. The court did not create limitations on the sum of money a landlord may require a tenant to pay into security. That was done decades ago by the Pennsylvania legislature in a statute entitled The Landlord and Tenant Act of 1951. It provides: “No landlord may require a sum in excess of two month’s rent to be deposited in escrow for payment of damages to the leasehold premises and/or default in rent thereof during the first year of any lease. During the second and subsequent years of the lease or during any renewal of the original lease the amount required to be deposited may not exceed the one month’s rent.” [Note: this section does not use the words “security deposit;” rather, it limits sums deposited in escrow to cover damages and unpaid rent.]

What the court was asked to do, in part, was determine whether the landlord’s demand that new tenants pay a security deposit equivalent to two month’s rent, plus prepayment of the last month’s rent violated the LTA’s limitation. While the landlord argued that the last month’s rent should be considered a “prepayment of rent” and not “security,” the court concluded otherwise. Regardless of what you call it, prepayment of the last month’s rent was to protect landlord against default in payment of the last month’s rent. And that makes it the type of payment for which there is a limitation. As the court stated, “It is disingenuous for [landlord] to assert that rent paid twelve months before it is due is not for ‘default in rent.’”

We can easily appreciate the benefit to landlord of requiring prepayment of the last month’s rent, especially after the first year of a lease when the security deposit is limited to one month’s rent. Tenants not intending to renew are tempted to not pay the last month’s rent, figuring that the deposit will suffice (and some tenants conclude that they weren’t getting the deposit back anyway). The security covers the rental default, but what about damages?

The court was not called upon to second-guess the limitations imposed by the LTA and did not do so. Striking a fair balance between a landlord’s right to collect sufficient funds and a tenant’s protection from unreasonable financial demands is a matter for the legislature. That landlords, for years, collected more than the LTA limitations is of no consequence.  That it took a seemingly abusive situation is why the matter came before the court and why we now have clarification of the limitations. Regardless of the reason, expect heightened scrutiny of landlord practices.

While the holding in the case is relatively simple, the questions it has generated are more difficult. To best answer these, forget the label (remember, the LTA does not refer to “security deposits” in the limitations quoted above; it refers to sums in escrow for damages and default in payments). Requiring prepayment of the last month’s rent is a such a payment no matter what you call it.  When you charge for something in advance to protect against nonpayment or damages, it is subject to the limitations.

To your questions. One is what to do with any surplus you or the landlord may be holding.  Again, we advise that you consult counsel or have your landlord do so. My clients will be advised to return what any excess above two or one month’s limitation (depending upon the year of the lease). For example, if a landlord is in the fourth year of the lease and is holding one month’s security deposit and the last month’s rent, any amount over the one month’s security deposit  would be returned to the tenant with a note indicating that a recent court decision made interpretation of the amounts that a landlord may hold in escrow clear and therefore the last month’s rent is being returned. It would make sense for a landlord to remind tenants that payment of the last month’s rent is required and the one month’s security deposit may not be used in lieu of the last month’s rent (good luck). Clearly, the landlord will not be secured against the tenant’s nonpayment of the last month’s rent and damages caused by tenant. This is the LTA’s limitation that the court cannot sweep aside.

Another question that can be answered with a fair degree of confidence has to do with pet deposits. By looking at the court’s holding, we know that requiring the tenant to post a fund that will be used to pay damages/nonpayment of the rent in the future is subject to the limits on the amount that may be charged. Since a pet deposit is to protect against damages, it together with any other sums so charged (e.g., security deposit, last month’s rent) must fall within the limitations posed by the LTA.

So, what to do to protect against pet problems since we cannot charge additional security above the limitations? Consider charging more rent because of the greater wear and tear anticipated due to the presence of the pet. Some would argue that it is better to hold a deposit for actual damages rather than try to anticipate by charging greater rent. Perhaps so. Also, nothing prevents a landlord pursuing unsecured damages after the fact, by suit if necessary.

Other questions have to do with the periodic payment of rent; must it be monthly or can landlord charge for 60-day periods, payable on the first of every other month? (Regardless of the answer, keep in mind that the upfront security limitations are calculated on monthly rent.) The question comes up when tenants with no, or poor, credit who would otherwise be ineligible to lease, offer to pay substantial rent upfront. The lease for such tenant might provide that rent is payable in two installments, six months apart. The LTA is silent on how rent is charged, but we know an exercise that helps us answer: Are the payments charged to protect against damages or nonpayment of future rent? If the substantial prepayment is refundable to the extent that it represents prepayment of rent not yet due, and the tenant has asked to make the substantial payment, it may pass muster. CONSULT COUNSEL! Having a court order return of tenant’s payments is one thing; breaching the Unfair Trade Practices and Consumer Protection Law and being required to pay three times actual damages, is another.

As for requiring that rent be paid at the beginning, rather than at the end of the month, yes, you may continue that practice. The prepayment that the Superior Court found objectionable in this case was payment of the 12th month’s rent in advance that, as the Court explained, served as an additional security that took the total over the statutory limit.

The LTA limitations examined by the court will result in increased tenant scrutiny. As noted in one comment to the article, you may run into a tenant who fails to pay the last month’s rent and leaves the property in a terrible state. Understood. And because the LTA imposes limits, we are stuck. What to do? Exercise due diligence when approving tenants. Make use of those references to determine past behavior. Obtain credit reports. Engage in period inspections of the property.  A landlord is not restricted to charging for property damage after the tenant has vacated. If the tenant is required to maintain the property, breaches during the year can be addressed and sums can be taken from the existing security deposit with the requirement that the tenant replenish it to the appropriate amount. In such cases, the tenant should be notified immediately upon deduction of funds from the security and should be provided notice of the reasons so that a challenge can be made if appropriate. Keep in mind that egregious landlord conduct led to the Superior Court’s decision. Conduct of a similar nature and abuse of tenants and their funds is likely to lead to similar results. Landlords who conduct their business fairly, honestly and appropriately should have little to fear in the courts, certainly with respect to UTPCPL damages that were awarded in the recently reported case.

Addendum:  Since publication of the above, a member asked whether it is legal to charge a “pet fee” as opposed to a “pet deposit.” Her thinking is that the “pet fee” is not a deposit to offset future damage, but rather a one-time fee for the anticipated wear and tear that a pet is likely to cause to the property.  In essence, this would be akin to raising the rent (“fee” divided by months of term equals monthly rent increase). Rather than raise each monthly rent payment, the landlord charges a non-refundable “pet fee” as the additional charge to allow the pet.  Since this one-time, non-refundable “pet fee” is not a deposit to be applied to future damage or rents, it does not seem to violate the cap on security deposits and is therefore permissible. Once again, my advice is to check with your legal counsel as this is an evolving area of landlord/tenant law.