Tenants’ security deposits: Makin’ ’em and transferrin’ ’em

Down Money. Hand Money. Good Faith Deposits.

These terms mean something to Realtors®; they represent an important part of most residential real estate transactions. This is the money that the buyer deposits, typically with the listing broker, to be applied to the purchase price of the property. Most Realtors® are at least passingly familiar with their duties and responsibilities for handling money belonging to another when property is being bought and sold. Is there the same level of familiarity with the broker’s obligations and responsibilities when representing a landlord?

Representing landlords is a niche market that requires special knowledge. At times, the relationship between the broker and the property owner expands beyond merely trying to find a tenant to encompass the greater responsibilities of a “property manager.” Whether you are new to property management or are an old hand, it seems timely to review the broker’s obligations for handling security deposits.

A broker is not obligated to maintain rental security deposits, even when hired in the role of property manager. The owner always has the right to manage the security deposit accounts for their rental properties. If part of the broker’s responsibilities to the owner includes managing security deposits, then the security deposits must be held in an escrow account at a federally or state insured bank or depository. When the broker accepts money that will be used as a security deposit, the money must be deposited into the security deposit escrow account by the end of the next business day following receipt of that money.

As with residential real estate sales, a broker may, with written permission, delay depositing a check that was given as the security deposit until the business day following the owner’s approval of the proposed tenant’s application. Note the timing:  When a prospective tenant submits a rental application, the prospective tenant might also give the broker a check to cover the security deposit. Once the owner accepts the (now) tenant’s application, the broker must deposit the security deposit check into the escrow account within one business day. Query: What happens if the owner accepts the proposed tenant, but, in the interim, the proposed tenant decides they don’t want that unit?

Disbursing proceeds from the security deposit account is triggered when the tenancy ends. While the Landlord and Tenant Act has its own requirements as to when and how the security deposit must be returned to the tenant, those obligations must be read together with the obligations and limitations in the Real Estate Licensing and Registration Act and the related regulations.

What happens, however, if the owner decides to sell his or her rental properties? What happens if the owner no longer wants you to manage the rental properties? What do you, the broker, do with the security deposits you are managing?

First and foremost, it is critical that you get your instructions from the owner in writing. As the broker, you are permitted to transfer the security deposits from your escrow account to another escrow account, regardless of whether it is managed by the current owner, a new owner, or a new broker. However, you need to know the name of the financial institution, the address (including branch address, if applicable) where the account will be maintained, the name on the account. The two financial institutions may have additional requirements that need to be satisfied in order to finalize the transfer, and you have an obligation to cooperate with them. You must not…let me repeat that; you MUST NOT withdraw the funds from the escrow account to present a check to the new bank, new owner, or new broker. The funds must transfer directly from bank to bank.  Once you have the information that you need to transfer the funds, you need to notify the tenants, in writing, of the name and address of the institution into which the deposits are being transferred, as well as the amount of each deposit being transferred.

There are two other points to remember: (1) the institution receiving the security deposits must be federally or state insured; and (2) this ability to transfer security deposits is limited to security deposits maintained in the landlord-tenant relationship. In other words, do not presume that you can transfer “Down Money”, “Hand Money” or “Good Faith Deposits” the same way. You cannot. But that is an article for a different day…

A final word of caution: The Landlord-Tenant Act has its own requirements and limitations on collecting, maintaining and returning security deposits. Those obligations must be met in addition to the ones set forth above, as well as other requirements, obligations and limitations for property managers detailed elsewhere in the licensing laws governing real estate professionals. As always, if you wonder what you can, must or should do, check first with your broker, then with a good lawyer.