How to Handle Tenant Holding Deposits

A holding deposit is an amount of money a landlord charges a potential tenant to take a rental off the market and reserve it before a lease or rental agreement is signed. In some markets, a holding deposit is called a "holding fee."

Such fees might sound like a good idea for landlords, but read on to learn why you should proceed with caution if you decide to collect a holding deposit.

Why Would Landlords Charge a Holding Deposit?

If you conditionally accept an applicant for your rental, but haven't yet signed a lease or rental agreement, you might want a deposit to hold the rental unit while you do a credit check or call the applicant's references.

Alternatively, 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 before you agree to take the rental off the market. After all, if the applicant isn't able to secure the funds, you'll have to start the rental process with another applicant and absorb the costs of the rental sitting empty in the meantime.

Holding deposits have benefits for renters, too: Some renters might want to reserve a unit while continuing to look for a better one. Paying a holding deposit might be worth it for the renter to have the security of knowing they have a backup plan.

Should Landlords Charge Holding Deposits?

Accepting a deposit to hold a rental unit open for someone is legal in some states but almost always unwise. From a business point of view, accepting a holding deposit doesn't do a landlord a lot of good—and all too often results in a misunderstanding or even a legal dispute.

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.

If your state allows holding deposits, investigate what the requirements are. For example, 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.

Can Landlords Charge a Fee for Rental Waitlists?

Note that even in states that allow holding deposits, deposits collected to put an applicant on a waitlist for a rental are often illegal. For example, Washington allows landlords to charge holding fees, but explicitly prohibits waitlist fees. (Wash. Rev. Code § 59.18.253 (2024).)

Landlords Need to Have a Written Holding Fee Agreement

If you decide to take a holding deposit, it is essential that both you and your prospective tenant have a written agreement outlining the exact purpose of the fee you've collected, how it can be used, and whether it's refundable.

Your holding deposit agreement should include:

• the amount of the holding deposit
• your name and that of the applicant
• the address of the rental property
• how long—give specific dates—you will reserve the rental for the applicant
• whether you will continue to show the rental during the reserved time or accept backup applicants
• the term of the rental agreement or lease that the applicant will sign if the tenancy proceeds
• 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.

Be sure to have the applicant sign the agreement. It's also a good business practice to provide the applicant with a receipt for the deposit.

What Should Landlords Do With a Holding Deposit?

After signing the agreement and providing a receipt, you have a couple of options for how to handle the deposit. First, check your state's law (if any) on holding deposits and find out if you are required to hold the deposit in any specific manner.

If your state doesn't give you direction on how to deal with a holding deposit, you could hold onto the check without depositing it. This is risky, though—the applicant could stop payment on the check if they decide to not rent the unit.

A better option is to deposit the check right away into an escrow account or secure account where the money will not be used for any purposes other than those designated in your written agreement. If your holding deposit is refundable or to be applied to the tenant's rent, it doesn't belong to you until the date noted in the agreement.

Once the conditions outlined in your agreement have passed, you can transfer the funds to your operating account, return them to the applicant, or apply them as designated.

Additional Holding Deposit Resources

You can find a sample Receipt and Holding Deposit Agreement form in Nolo's book Every Landlord's Legal Guide.