New Jersey Landlord-Tenant 101: Security Deposit Issues

I am periodically contacted by New Jersey landlords with what I call “tenancy” questions concerning a current or prospective residential tenant, e.g., what happens if the Landlord Registration Statement was not properly filed/served/posted, how should a tenant’s security deposit be handled, can this or that tenant be evicted, and what should be done with a tenant’s property after eviction.  I am always happy to add my two cents, as making informed decisions can help a landlord to maximize the value of their property.  I thought it might be helpful to cover some (not all) of the basic questions and related topics in a series of blog posts.  In the first post, we talked about some of the pre-tenancy issues that come up.  Today, we’ll talk about security deposit issues.

SECURITY DEPOSIT ISSUES

Q:  When must a landlord comply with New Jersey’s Rent Security Deposit Act (Security Deposit Act), N.J.S.A. 46:8-19 to N.J.S.A. 46:8-26?

 

A:  The Security Deposit Act applies to all residential landlords except for owner-occupied premises with not more than 2 rental units. BUT: even residential tenants generally not covered by the Act -- i.e., owner living on-site with no more than 2 rental units – can invoke the provisions of the Act with 30 days notice to the landlord, so pretty much any landlord in NJ could be subjected to it.

 

Q:  How much can be held as a security deposit?

 

A:  A residential landlord cannot hold more than 1½ times the monthly rent as security.  Obviously, there is little sense in holding less than the maximum amount permissible.  Upon any annual rent increase, a landlord cannot ask for more than 10% of the existing deposit as additional security.  A refundable “pet deposit” is considered part of the security deposit when calculating whether a landlord is holding security in excess of the maximum permissible amount. 

 

Q:  How must a security deposit be handled under the Security Deposit Act?

 

A:  Security deposits must be maintained in NJ-based financial institutions.  A landlord handling 10+ units is required to place a tenant’s security deposit in either an insured money market fund or a federally insured bank account with interest set at least quarterly and payable at a rate equal to the average rate of interest paid by the bank or fund on similar money market accounts.  A landlord handling less then 10 units is required to place a tenant’s security deposit in a federally-insured bank account with interest payable at a rate equal to the bank’s savings account.  A landlord may place all security deposits in one account so long as the landlord complies with all other requirements of the Security Deposit Act (notice, etc.).  A landlord handling units for “seasonal use or rental” (no more than 125 consecutive days for residential purposes by person having permanent residence elsewhere) does not have to place security deposits in a money market fund or bank account.

 

It is important to remember that all interest earned on the security deposit now belongs to the tenant (2004 law change) and that the interest must be paid to the tenant or credited toward payment of rent due on an annual basis (either lease anniversary or January 31).

 

It is also important to remember that no deductions may be made from the security deposit of a tenant while the tenant remains in possession of the rental unit.  In other words, a landlord is not permitted to apply the security deposit against unpaid rent or damages while the tenant is still living in the unit.  In contrast, a tenant is permitted to apply the security against unpaid rent if the landlord is non-compliant with the Act. (See below.)

 

Q:  What notices must be provided to a tenant and when?

 

A:  A landlord must give each tenant supplying the security deposit with the following written notice: the name and address of the investment company (money market fund) or bank holding the security deposit; the type of account; the current rate of interest; and the amount of the deposit.  A landlord must provide this notice as follows:

  • Within 30 days of receipt of the deposit from the tenant.
  • Within 30 days of moving the deposit from one bank or investment company to another or one account to another, unless change in bank or account occurs less than 60 days from the annual interest payment in which case the change notice can be provided with the notice accompanying the annual interest payment (see below).  In the case of a bank or company merger, the landlord has to provide the required notice to the tenant within 30 days of notice of the merger.
  • At the time of each annual interest payment.
  • Within 30 days after transfer or conveyance of ownership or control of the rental property.

Q:  What happens if the required notices under the Act are not provided?

 

A:  If a landlord fails to provide the notice(s) required under the Security Deposit Act, a tenant can provide the landlord with written notice that the security plus an amount representing interest at 7% annually should be applied on account of unpaid rent.  In addition, the tenant is not required to make any further security deposit and the landlord is not permitted to make any further demands for additional security.  The same relief is available to a tenant if a landlord fails to invest/deposit the security or to pay/allocate the interest to the tenant.  In other words, if a landlord fails to handle the security as required by the Act, the tenant can apply the security to unpaid rent and the landlord cannot replace it.  A landlord is given a small reprieve against this dramatic relief: if a landlord fails to pay the annual interest or provide the annual notice (see above), a tenant must first give the landlord written notice and 30 days to comply before the security can be applied against unpaid rent.

 

Q:  How should a security deposit be handled when a tenant leaves the unit?

 

A:  Generally, within 30 days after termination of the lease, a landlord must provide a tenant with the following in person or via certified or registered mail: an itemized accounting of the interest earned on the security deposit and the deductions made from same under the lease; and, a sum equal to the security deposit plus accrued interest less any deductions made under the lease.  (Different rules apply to displaced tenants and victims of domestic violence.)  This rule applies even if the tenant is in default under the lease.  In other words, even if a landlord believes that a tenant has defaulted under the lease, the landlord must still comply with the above requirements, but that does not necessarily mean that the landlord has to send a check to the tenant along with the itemized accounting. (See below.)

 

Q:  What happens if a security deposit is improperly handled when a tenant leaves the unit?

 

A:  Generally, failure to properly handle a tenant’s security deposit within 30 days of lease termination exposes a landlord to damages at double the amount of the deposit wrongfully withheld.  For landlords, the emphasis should be on “wrongfully withheld.”  In other words, the tenant is not necessarily entitled to double the amount of the full security deposit; instead, the tenant is only entitled to double the amount of the security that the landlord was not permitted to hold on to.  So, if a landlord sends an itemized accounting to the tenant within 30 days with deductions equal to or greater in value than the amount of the security deposit, and has lease language and evidence supporting the deductions, the landlord should be safe from any “double damage” claims by the tenant and no security should be returnable to the tenant.  The important things are to get the written accounting out to the tenant within 30 days (even a few days delay can be costly), to have evidentiary support for all deductions and to return any balance after deductions.

  

The next post in this series will discuss the various grounds for eviction available to a landlord in New Jersey.

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