Q & A on Collecting Security Deposits from Rent-Stabilized Tenants

When renting rent-stabilized apartments, you probably require security deposits from tenants, in case they cause any damage. A security deposit is money that a tenant deposits with the owner of the apartment for the repair of any damages to the apartment for which the tenant is responsible. Various laws govern how you must collect, retain, and refund these security deposits. Not only must you comply with the security deposit requirements set out in the state’s General Obligation Law, you must also comply with those in the Rent Stabilization Code.

To help you better understand what you can and can’t do, here are the answers to six commonly asked questions about security deposits.

Collect Correct Amount

Q Is there a limit on the amount of the security deposit I can collect from a rent-stabilized tenant?

A Yes. Rent Stabilization Code Section 2525.4 allows you to collect no more than one month’s rent as a security deposit. However, if you collected two months’ security deposit from a tenant when the apartment first came under rent stabilization and the same tenant is still occupying the apartment, you can continue to hold the tenant’s two-month deposit until the tenant reaches the age of 65, or receives Social Security disability retirement benefits or SSI benefits. And the next rent-stabilized tenant cannot be required to deposit more than one month’s rent as security deposit.

In one case, a rent-stabilized tenant complained of rent overcharge, specifically that the owner held more than one month’s security deposit even though the tenant was more than 65 years old. The owner argued that it bought the building from a hospital that originally rented to the tenant under an employee occupancy agreement. Since the prior owner collected two months’ security deposit while the building wasn’t rent stabilized, the owner shouldn’t have to refund the second month’s deposit. The District Rent Administrator (DRA) ruled for the tenant, and the owner appealed. The DHCR ruled against the owner. Rent Stabilization Law Section 26-511(c)(5) provides in relevant part that no owner can retain a security deposit or advanced rent payment in connection with the use and occupancy of an apartment by a tenant who is 65 years of age or older. So the owner had to refund the second month’s security deposit to the tenant [Phillips: DHCR Adm. Rev. Docket No. ET210079RT, April 2017].

Security Deposit Not Turned Over to New Owner

Q I bought a building at foreclosure, and the security deposits weren’t turned over to me. Can I ask the tenants to pay me new security deposits?

A No. An owner may collect only one month’s security deposit. The tenant paid this amount to the prior owner. So if you ask the tenant to pay you another security deposit, the DHCR would consider this to be a rent overcharge.

The new owner of the building is responsible for security deposits. When a building is sold or title is transferred in foreclosure, the prior owner must transfer all security deposits to the new owner within five days, or return the security deposits to the tenants. Owners must notify the tenants, by registered or certified mail, of the name and address of the new owner. Purchasers of rent-stabilized buildings are directly responsible to tenants for the return of security deposits and interest. This responsibility exists regardless of whether the new owner received the security deposits from the former owner.

Increasing Deposit on Lease Renewal

Q Can I increase the security deposit when the tenant renews his lease and the rent increases?

A Yes. When you renew a rent-stabilized tenant’s lease and raise the rent, you can collect an increase in the tenant’s security deposit. That’s because you’re legally entitled to collect one month’s rent as a security deposit. So if the tenant’s monthly rent increases, you may increase the security deposit to reflect the new, higher rent.

This applies even though a tenant may be exempt from paying a lease increase because of his or her Senior Citizen Rent Increase Exemption (SCRIE) or Disability Rent Increase Exemption (DRIE). These tenants would still be required to pay the increased security deposit amount.

Collecting Extra Amount for Apartment Modifications

Q The tenant of a rent-stabilized apartment wants to make a special wall modification. Can I collect an extra amount to hold in escrow to guarantee that the tenant will restore the wall when he moves out?

A Possibly. But you should do two things to help convince the DHCR not to consider this amount to be an extra security deposit. First, you and the tenant should sign a statement saying that the tenant is allowing you to hold this extra amount in escrow to guarantee that the tenant will restore the modification when he moves out. And second, in the statement you and the tenant sign, don’t refer to this extra amount as a “security deposit.”

One owner did this successfully in a DHCR case. In it, a tenant complained that the owner refused to refund money held in escrow. The DRA ruled for the tenant and ordered the owner to refund any amount held in excess of the $250 security deposit. The owner appealed, explaining that based on an agreement with the tenant, the owner collected an extra $225 separate from the security deposit. The tenant had modified an apartment wall and had agreed that the owner could hold $225 in escrow to guarantee that the tenant would restore the wall if he moved out. The DHCR ruled that the agreement between the owner and tenant about restoring the apartment wall was reasonable and that the owner didn’t have to refund the $225 to the tenant [Fraclac Realty Corp.: DHCR Adm. Rev. Docket No. BH410015RO, Oct. 1996].

Keeping Deposit of Tenant Who Moves Out Owing Rent

Q A tenant who owes back rent recently moved out of his apartment. May I keep the tenant’s security deposit to make up for the rent he owes?

A Yes. Although security deposits aren’t meant to be applied to rent, you may use the security deposit to cover all losses, including damage to the apartment and back rent owed by a tenant. For example, one appeals court ruled that an owner could deduct the back rent owed by a tenant from the tenant’s security deposit. The owner had withheld one month’s rent from the security deposit after the tenant moved out without paying the last month’s rent. The court ruled that the owner was entitled to a setoff against the security deposit of any rent owed by the tenant [Wheeler v. Andriani, March 2001].

Storing Security Deposits

Q How must owners store security deposits in New York?

A The security deposit must be stored in an interest-bearing account at a banking institution that has a location within the State of New York. The deposit must not be commingled with any personal money of the owner, and the owner must not attempt to use the money from the security deposit as if it is his or her own.

For buildings with six or more units, owners must place tenants’ security deposits in an interest-bearing account. The account must earn interest at a rate that’s equivalent to the prevailing interest rate for similar deposits in the area. The owner is allowed to collect an annual fee that’s equivalent to 1 percent of the security deposit to cover administrative costs.

The remaining interest earned belongs to the tenant. The tenant has three options for this interest. The owner can hold this money for the tenant in the trust until the end of the lease, put this money toward the tenant’s rent, or pay this interest in a lump sum to the tenant at the end of each year.

Once an owner deposits a tenant’s security deposit in a banking institution, the owner must notify the tenant in writing. This written notice must include the name and address of the bank and the total amount of deposited money.