Security Deposits Limited to One Month – What’s a Landlord to Do?November 2019 | By: Scott M. Smiler, Esq.| GDB 2019 Fall Newsletter
As previously discussed in our last newsletter, and in another article in this newsletter, Governor Cuomo recently signed into law The Housing Stability and Tenant Protection Act of 2019, more commonly known as the New Rent Law, which drastically altered the landlord-tenant landscape and made sweeping changes to the practice of real estate law.
One of the changes regards security deposits. Prior to the enactment of the New Rent Law, landlords in non-rent regulated residential units were free to set the amount of their tenant’s security deposit as they saw fit – traditionally, between one to three month’s rent. This has changed as the New Rent Law now mandates that no tenant deposit or advance shall exceed one month’s rent.
The entire amount of the tenant’s deposit or advance shall be refundable to the tenant within fourteen days of the tenant vacating the demised premises except for an amount lawfully retained by the landlord for the reasonable and itemized costs due to tenant’s non-payment of rent, damage caused by the tenant beyond normal wear and tear, non-payment of utility charges payable directly to the landlord under the terms of the lease or tenancy, and moving and storage of the tenant’s belongings. Within such fourteen day period, the landlord shall also provide the tenant with an itemized statement indicating the basis for the amount of the deposit or advance retained.
The New Rent Law also imposes a pre- and post-occupancy inspection period.
Any party who violates these provisions shall be liable for actual damages, and a person found to have willfully violated them shall be liable for punitive damages of up to twice the amount of the deposit or advance.
Law’s Effect on Cooperatives
One important and unintended consequence is the law’s effect on cooperatives. Cooperative boards are given the task and authority under its governing documents to approve potential purchasers. Some purchasers do not have strong enough financials to garner board approval, but in lieu of an outright rejection of the purchaser, cooperative boards quite often grant a conditional approval which, among other things, requires the purchaser to place a certain amount of money in escrow for a defined period of time. The amount of the escrow is usually equal to 6 to 24 months of the unit’s monthly maintenance, and the escrow is returned to the purchaser (now a shareholder) so long as he/she is not in default of his/her financial obligations to the cooperative for a period of time, usually equal to 6 to 24 months. Each maintenance escrow agreement is case specific. However, if the escrow amount is greater than one month’s maintenance, the cooperative would run afoul of the New Rent Law.
What’s a landlord, or cooperative to do?
- Reject the tenant (or in the case of a cooperative, reject the purchaser).
- Take a security deposit from the tenant (or in the case of a cooperative, a maintenance escrow from the purchaser) in an amount equal to one month’s rent (or in the case of a cooperative, an amount equal to one month’s maintenance).
- In addition to or in lieu of Option #2, have an individual or entity personally guaranty the rental payments (or in the case of a cooperative, the maintenance payments).
- In addition to or in lieu of Option #2, have an individual or entity personally guaranty the rental payments (or in the case of a cooperative, the maintenance payments) AND have the guarantor deposit with the landlord (or the cooperative, as the case may be) a certain dollar amount to securitize the guarantor’s obligations. Since these funds are not deposited or advanced by the tenant, but rather, the guarantor, we believe that this arrangement is permitted under the New Rent Law.
- In addition to or in lieu of Option #2, there are third-party companies that will guaranty the tenant’s rental payments under a traditional lease. (We have not seen this in connection with the guaranty of a proprietary lease). However, in the event the tenant (as opposed to the landlord) pays the third-party company’s fees, then the aggregate amount of the fees should not exceed an amount equal to one month’s rent; otherwise, there is a risk of violating the New Rent Law. It is also advised that a landlord not take a security deposit equal to one month’s rent AND have the tenant pay the third-party company’s fees – this arrangement would aggregate to an amount greater than a deposit or advance equal to one month’s rent and would violate the New Rent Law.
For both traditional landlords and cooperatives, the law makes it more difficult to operate and emphasizes the necessity for a well-drafted personal guaranty.