How to Handle Tenant Holding Deposits

If you make a deal with a tenant but don’t actually sign a lease or rental agreement, you may want a cash deposit to hold the rental unit while you do a credit check or call the tenant’s references. Or, if the tenant needs to borrow money (or wait for a paycheck) to cover the rent and security deposit, you might want a few hundred dollars cash to hold the place. And some tenants may want to reserve a unit while continuing to look for a better one.

Should landlords accept these kinds of holding deposits? Accepting a deposit to hold a rental unit open for someone is legal in some states but almost always unwise. Holding deposits do landlords little or no good from a business point of view, and all too often result in misunderstandings or even legal fights.

A prime reason to avoid holding deposits is that the laws of most states are unclear as to what portion of a holding deposit a landlord can keep if a would-be tenant decides not to rent or doesn’t come up with the remaining rent and deposit money, or if the tenant’s credit doesn’t check out to your satisfaction.

In California, for example, the basic rule is that a landlord can keep an amount that bears a “reasonable” relation to the landlord’s costs—for example, for more advertising and for prorated rent during the time the property was held vacant. A landlord who keeps a larger amount may be sued for breach of contract. A few states require landlords to provide a receipt for any holding deposit and a written statement of the conditions under which it is refundable.

If you decide to take a holding deposit, it is essential that both you and your prospective tenant have a clear understanding in writing, including:

• the amount of the holding deposit
• your name and that of the applicant
• the address of the rental property
• the dates you will hold the rental property vacant
• the term of the rental agreement or lease
• conditions for renting the applicant the available unit—for example, satisfactory references and credit history and full payment of first month’s rent and security deposit
• what happens to the holding deposit if the applicant signs the rental agreement or lease—usually, it will be applied to the first month’s rent, and
• amount of the holding deposit you will keep if the applicant doesn’t sign a rental agreement or lease—for example, an amount equal to the prorated daily rent for each day the rental unit was off the market plus a small charge to cover your inconvenience.

See Every Landlord’s Legal Guide For a sample Receipt and Holding Deposit Agreement form which covers each of these items.