Holding Deposits for Rental Property & The Legal Rights of Prospective Tenants
A landlord may ask a prospective tenant to provide a certain amount of cash in order to hold a rental unit for a certain time. If you eventually do not rent the unit, the landlord may retain all or most of this deposit. Situations in which this may happen include when the prospective tenant does not pass a background or credit check to the landlord’s satisfaction, or when the prospective tenant does not have enough money on hand to cover the initial rent and security deposit. (A holding deposit should not be confused with a security deposit, which is a separate fee.)
State laws vary regarding how much of the holding deposit would be reasonable for a landlord to keep. It may depend on how much time passed before the landlord could rent the unit to someone else, or on the additional costs that the landlord bore because the tenant backed out. The landlord might need to advertise the property again, for example, and they would be missing out on rent during that time.
Drafting an Agreement for a Holding Deposit
Since your rights as a prospective tenant in this area are ambiguous in most states, you should come to a clear, written agreement with the landlord that provides how much of the deposit the landlord will retain if you do not rent the unit. The agreement should cover the amount of the deposit, the time during which the landlord will keep the unit vacant for you, and any arrangements for returning the deposit or applying it toward the security deposit. (Holding deposits often are applied toward the first month’s rent once the tenant signs the agreement, but you should ask the landlord for a receipt that states this in writing.)
If the landlord violates this agreement, you can take them to small claims court to recoup the deposit or the portion of the deposit that you are due under its terms.
Holding Deposit Agreement Terms
The names of the prospective tenant(s) and the landlord
The unit’s address
The amount of the deposit
The dates when the unit will be held
The conditions under which the deposit will be returned, if at all
The reasonable amount of the deposit that the landlord may keep
Whether the deposit will be applied to the first month’s rent or the security deposit
Not every fee that a landlord asks you to pay may be appropriate. Holding deposits and costs of credit reports are probably legitimate, but landlords generally should not be allowed to receive finder’s fees for renting you a unit. Finder’s fees can be paid to a real estate broker for helping you find a home, since brokers perform services for you above and beyond renting the unit. Some landlords, especially in densely populated cities, still ask for finder’s fees, which may be camouflaged by an apartment locator service set up by the landlord.
Tenants who want to challenge a request for a finder’s fee by a landlord may be able to argue that it is a type of security deposit. If state law supports this position, and non-refundable security deposits are not allowed in your state, the landlord should not be allowed to keep a finder’s fee. You might also sue the landlord for fraud in small claims court, since you are essentially paying for nothing. In some areas, finder’s fees have been explicitly prohibited, and a tenant may simply alert the local city attorney or district attorney to the misconduct.