Wednesday, July 10, 2013

Drafting the Residential Lease - Security Deposits

K.R.S. §383.545 (13) defines the meaning of the term "Security Deposit" as it is used in Kentucky's enactment of the Uniform Residential Landlord and Tenant Act.
"Security deposit" means an escrow payment made to the landlord under the rental agreement for the purpose of securing the landlord against financial loss due to damage to the premises occasioned by the tenant's occupancy other than ordinary wear and tear.
But, there are many other uses for deposits commonly required by landlords. A key deposit, for example, does not involve "damage to the premises occasioned by the occupancy." It just involves the tenant returning the keys to the locks on the doors at the end of the tenancy. If the tenant returns the keys upon surrendering occupancy, the tenant gets the deposit back. If the keys are not returned to the landlord, the key deposit is forfeited and the landlord has the option of using the money to replace the locks, or at least to replace the keys. Either way, there is no "damage to the premises."

Possible types of deposits:
  • Key deposit;
  • Cleaning deposit;
  • Junk removal deposit;
  • Appliance deposit - some appliances are fixtures and some are not;
  • Furniture deposit - for furnished apartments;
  • No smoking deposit;
  • Yard maintenance deposit, and;
  • Others, depending upon the peculiarities of the rental.
As a landlord, my drafting objectives would be:
  1. To allocate the total deposit among every reasonably imaginable contingency;
  2. To provide for the re-allocation of deposited amounts between categories if events during or at the end of the tenancy prove that to be necessary;
  3. To provide for clear documentation of starting conditions at the beginning of the tenancy and ending conditions at its termination, to which the tenant agrees, dissents or abstains;
  4. To specify objective criteria to clearly establish how much of the deposit can be transferred out of escrow for the landlord's benefit, and when that transfer may be effected;
  5. To specify objective criteria to clearly establish how much of the deposit can be transferred out of escrow and returned to the tenant, when that transfer must be effected and how;
  6. How to allocate the expense of maintaining an escrow bank account and the allocation of any interest earned by the deposit over time, and;
  7. Something I haven't thought of yet.
As a tenant, I'd want to include provisions in the rental agreement that addressed these concerns:
  1. For any tenancy lasting more than a year, that the security deposit in all it's guises be re-visited at least annually to update the documentation on the condition of the leased premises and to settle any landlord claims at the time the lease is renewed, when everyone is still friendly.
  2. To provide for a disposition of the security deposits in the event of the landlords bankruptcy or the sale of the property, forced or otherwise. See: Conundrums, Foreclosure and Tenant Security Deposits Under URLTA and PTFA
  3. Something else I haven't thought of yet.
Yeah, this is a work in progress, and yeah, I didn't get around to the drafting part, and yeah, this will be revised sometime. I'm thinking about it.