Residential Apartment Security Deposit Law Update -

By Bruce E. Gudin, Esq.

A recurring issue in New Jersey Landlord Tenant Law is the treatment and handling of a residential tenant’s security deposit. The essence of a residential apartment security deposit is to protect the landlord against a tenant’s failure to follow up on his or her responsibilities and obligations to the leasehold. This article will discuss New Jersey’s security deposit Law, (the Rent Security Deposit Act,) which specifies how landlords must collect, maintain, and return a security deposit.

The Rent Security Deposit Act applies to all rental units, including single-family houses that are rented out. The only exception is for 2 or 3-family owner occupied houses where one or two of the units are rented out. However, the law can apply to tenants in these small owner occupied buildings if the tenant sends a notice to the landlord stating that he or she wants the landlord to comply with the law’s provisions.

Security Deposit Collection-

According to New Jersey State Law NJSA 46:8-21.2, an owner or lessee/landlord may not require or accept more than 1½ times 1 month’s rent according to the terms of the lease, as a security for the rental of any real property used for dwelling purposes. This also means that a landlord cannot require a tenant to pay the last month’s rent in advance. In the event of a rent increase, a landlord is permitted to collect additional sums required to maintain the deposit at 1½ times the rent. However, the amount collected annually as additional security cannot exceed 10 percent of the current security deposit held by the landlord. For example, a Tenant leases an apartment for $1000 per month. The Landlord collects from the tenant at time of lease a $1500 security deposit. A year later the rent is raised to $1100 per month (assuming such a raise was permitted). The landlord may collect an additional $150 that year towards the security deposit but still cannot go over the $1650 mark, the new 1½ month rent amount.

The Rent Security Deposit Act requires landlords who rent 10 or more units to place tenants’ security money in either an insured money market fund or a federally insured bank account in New Jersey. The account must pay a rate of interest set at least quarterly and equal to the average rate of interest paid by the bank on money market accounts.

Landlords with fewer than 10 units may place the security deposits in bank accounts that pay at least the regular rate of interest.

In Durante v. Gadino, 157 N.J. Super. 132 (Law Div. 1978) an agreement was entered into by the tenants upon commencement of the initial lease, stating: “Receipt is acknowledged of the sum of $210.00 as full payment of refurbishing, repainting and repairs due to normal use, wear and tear of the above-mentioned apartment at the conclusion of this lease after the tenant has vacated.” The landlord required no security deposit. The Court found that these monies did not constitute “security” within the acceptable definition of the term, and also that the Security Deposit Law was not intended to apply to such a situation. Landlords are allowed to take such deposits because they are not conditional deposits to draw upon if a problem arises. However, even though such costs are permitted and not considered towards the 1½ month limit, considering the nature of the Act, the Law Division opinion of Durante may be challenged. A landlord can now conceivably take more then 1½ month’s rent in advance for “payment of refurbishing, repainting and repairs due to normal use, wear and tear of an apartment.”

Pets-

An additional security deposit may not be collected because a tenant has a pet. Remember, the landlord may not have more than 1½ month’s rent on deposit at any point in time as security. A NONREFUNDABLE PET FEE according to the Durante decision may be collected in addition to the lease security deposit.

Security Deposit Maintenance-

The Rent Security Deposit Act requires landlords to place the tenants’ security deposit in a separate bank account and not commingle the deposit with funds of their own. The Landlord must also give to the tenant, in writing, the name and address of the bank where the deposit is being kept along with the amount of the deposit, the type of account, and the current interest rate being paid for that account. This notice must be given to the tenant in writing within 30 days of the tenant giving the security deposit to the landlord. Landlords may put the security deposit information directly on to the lease, as the New Jersey Property Owners Association (www.POANJ.Org) lease form recommends, fulfilling the obligation of issuing the required notice. This also acts as proof of “receipt” of the notice by the tenant.

The landlord must also give the tenant notice of the deposit status at least once every year. The notice must also be given within 30 days after the landlord has moved the deposit from one bank to another, or from one bank account to another unless the change in bank or account takes place less than two months before their annual interest payment.

A new landlord must give the tenant this notice within 30 days of buying a property. It is the obligation of the purchaser to obtain from the seller at the time of the purchase all security deposits plus the accrued interest. BEWARE! The new owner is responsible for the full amount of each tenant’s deposit and must still issue all required notices about the account(s) whether or not the new owner received the deposits from the old owner. Note: If the property is an owner-occupied property with not more than two rental units, a tenant must ask the landlord to provide notices about the deposit in order for the owner to be obligated to do so.

All interest earned on a residential security deposit belongs to the tenant. Every year, this money must be paid to the tenant in cash or subtracted from the amount of rent owed on the renewal or anniversary of the lease. This must be done either when the lease is to be renewed or on January 31 of each year. In order to pay the interest on January 31 instead of at the time of renewal of the lease, a notice must be given to the tenant notifying him or her of that change.

Failing to Comply with the Security Deposit Act-

The Law states that if the landlord fails to invest or deposit the security money as required by law or to provide the proper written notice or to pay the interest as required, then the tenant can give written notice to the landlord telling the landlord to use the whole deposit (plus an additional 7% added as interest per year) to be applied on account of rent (future or back rent).

If a landlord holding a deposit fails to pay the annual interest or to provide the annual notice to a tenant at the time the annual interest payment is due, before a tenant can apply their security deposit towards rent he or she must give the landlord a written notice of the landlord’s failure to comply, and must allow 30 days for the landlord to cure this default. The landlord may then cure by sending out a notice or payment of interest; otherwise the tenant becomes entitled to apply their entire security deposit towards rent.

In all cases, if a tenant applies their security deposit as rent, the tenant is then without obligation to pay any future security deposit to the landlord and the landlord is not entitled to make any further demands for a security deposit.

Security Deposit Return-

The Security Deposit Act requires the return of a tenant’s security deposit with interest within 30 days of the termination of the lease (less any deductions owed to the landlord) by personal delivery, registered or certified mail. It is recommended that the deposit be returned to the tenant’s last known address if no forwarding address is provided.

Note: Effective as of January 1, 2004 Landlords are no longer entitled to a 1% handling fee on the security deposit.

If the landlord does not return a security deposit in full, he or she must give the tenant a complete, itemized statement of deductions and interest earned on the deposit. This statement must be sent by registered or certified mail. BEWARE! If a landlord fails to return the deposit and the tenant is forced to commence suit for its return, and the Court finds that any portion of the security deposit has been wrongfully withheld, the tenant is entitled to recover double the amount of the wrongfully withheld funds and may recover full costs and attorney fees, less any amounts owed to the landlord. The doubling penalty is mandatory where any amount is found to be due to the tenant.

Charges for Damages-

A tenant can only be charged for damages that are considered “excessive wear and tear,” such as holes in the walls from decorations put up by the tenant. As stated in Burns v. West America Corp., 137 N.J. Super. 442, 446-7 (Cty. Ct. 1975), “The lessor is entitled to retain only that portion of the security deposit necessary to compensate for the damages actually sustained by a lessee’s violation of the lease for which the deposit was made.” The tenant may not be charged for “ordinary wear and tear” such as faded paint or loose tiles. Cleaning fees may not be charged if the unit is broom clean. A landlord takes deductions at her own peril! No deductions may be made from a security deposit of a tenant while he or she remains in possession of the rental unit.

Due to the complexity of the law in the area regarding collection, maintenance, and return of a residential tenant’s security deposit, the legal system remains extremely active through the courts in resolving these issues. Since it appears that the law favors the tenants in these matters, strict compliance and adherence to the statutory scheme is recommended.

The information you obtain in this article is not legal advice. You should consult with a qualified attorney to discuss your own particular situation. Bruce E. Gudin, Esq. is a partner with the law firm of Ehrlich Petriello Gudin & Plaza headquartered in Newark, NJ. He can be reached at (973)643-0040 x-104 or by e-mail at Bruce@epgprlaw.com.