Today, attorney Robert A. Gleaner is joining us to talk about security deposits. The way security deposits are managed in New Jersey can be broken into five different areas:
- Purpose of security deposits
- Maximum amount you can collect
- Where to hold a security deposit
- The proper use of security deposits
- Release requirements
New Jersey Security Deposits: Purpose
Security deposits are collected because they guarantee that the tenant will do what the tenant is required to do under the lease. If they do not do it, the landlord can take that money. For example, if residents don’t pay their rent and leave the property before the end of the lease term, landlords can take that month’s installment of rent out of the security deposit and the remaining monthly rent installments. If residents damage the property, landlords can take the money for repairs out of the security deposit.
Generally, security deposits guarantee the tenant’s obligations.
New Jersey Security Deposit Maximum Amount
The most you can collect as a security is the equivalent of one-and-a-half months of rent. That means if the rent on your property is $1,000 per month, you can take $1,500 as a security deposit. This impacts the total move-in funds. If a new resident is moving in, they will pay you a total of $2,500: $1,000 for the first month of rent and $1,500 for the security deposit.
Some owners ask if they can take more, and the answer is no. It is a New Jersey statute. Depending on where the property is, you might take less than the maximum. That is up to you.
Where to Hold New Jersey Security Deposits
You can hold the resident’s security deposit in any banking institution that does business in New Jersey. Internet banks are okay as long as they’re licensed to do business in New Jersey. It must also be an interest bearing account. Not a lot of interest is being paid these days, but it is a requirement.
Keep in mind that this remains the tenant’s money. That means the interest being earned also belongs to the tenant. You are holding it in trust. Open the account by asking your tenant to sign a W9, which can be downloaded. You’ll need the taxpayer ID number as well as tenant name and property address Once it is signed, you can open the security deposit account in any bank you choose.
As interest accrues, you may go over that security deposit limit. Every year, you will need to return all the interest that was earned to the tenant. Keep track of this on an annual basis because even if only a few pennies were earned in interest, you’ll have to issue a check or credit the amount back to your resident. The easiest procedure would be to just credit against the following month’s rent and advise the tenant of the amount due for that following month.
Using a Security Deposit in New Jersey
You can use the security deposit if your tenant has not met the lease requirements, but you cannot use it during that period of time while the tenant is still a resident. You must wait until after the tenancy. You have 30 days, per New Jersey statute, to create a disposition letter figuring out how much you will want to deduct from the security deposit. You will then return any unused portion of the security deposit to your tenant.
Theoretically, if your tenants paid their rent through the end of the month that ends the lease and the place looks good, you would then send the full amount back within those 30 days, plus any accrued interest to that date. But, if they left a mess, such as holes in the walls or damage to a door, but the last month of rent was paid, you would then send a letter indicating that the security deposit was a specific amount, the last month of rent was paid, but then you would explain that fixing the door was $100 and the hole in the wall was $150; these numbers must be based on real amounts; so you should have a contractor’s invoice or your actual costs of repair. If the cost of repairs plus any unpaid rent exceeds the amount of the security deposit, you would advise the tenant that there would be no money coming back to the tenant. If they owe you money, let them know how much and how to pay.
REMEMBER: Send out the disposition letter within 30 days of the end of the tenancy and only use the money after the tenant has left.
Security Deposit Release Requirements
You’ll need the resident’s forwarding address so you can send that disposition letter and/or send a check. If they do not leave you an address and sneak out in middle of night, you would send the letter and/or check to their last known address, which is likely your property. If you do that, you have met the requirement and you are covered.
Remember the deadline: Within 30 days of the end of the tenancy. Your timeline does not start with the end of the lease. The lease may end on July 31, but if the tenants left on March 31, your 30 days start in March.
Security deposit law in New Jersey can be complicated. Contact Robert A. Gleaner, P.C. or any member of the Realty Solutions team for help and more information.