April 5th, 2012
By Douglas L. Fromme, Esq.

I am always surprised how confused both landlords and tenants often are about the proper way to hold tenant security money. Landlords usually require both residential and commercial tenants to deliver to them money equal to one or more month’s rent to be held as security for the tenant’s performance under the lease. If the lease is for a rent stabilized apartment, the landlord may not collect a security deposit in excess of one month’s rent and any security in excess may constitute a rent overcharge entitling the tenant to a refund with treble damages and attorneys fees. This article will address the landlord’s obligations and the tenants’ rights with regard to a security deposit.

Article 7 of the General Obligations Law (“GOL”) requires Landlords to maintain the security deposit separately from all other money. Security deposits may not be co-mingled with other funds. If an owner maintains the security deposit in its own bank account, that constitutes an impermissible co-mingling.

Owners of residential buildings containing six or more dwelling units have an additional obligation to maintain a separate interest bearing security account in the tenant’s name with a banking organization. The GOL provides the owner is entitled to the first one percent of any interest earned on this account as a management fee, while any interest in excess of one percent remains the property of the tenant. Tenants are usually required to complete and sign a W-9 form for submission to the bank so interest earned can be posted to the tenant’s account and a 1099 form sent to the tenant at the end of the year. If a W-9 form is not obtained from the tenant and no 1099 form is mailed to the tenant, it may indicate that the landlord has not placed the security deposit into a separate interest bearing account.

A landlord is required to notify the tenant in writing of the name and address of the bank in which the deposit has made along with the amount of the deposit. Sometimes this notice will be sent to the Tenant from the banking institution after the deposit has been made. If the tenant’s lease does not identify the banking institution and no written notice is received by the tenant from the landlord or the banking institution, this may also indicate that the security deposit has not been placed in a separate interest bearing account.

Security deposits for commercial leases, or for residential units in buildings containing less than six units may not be co-mingled with other money and must be placed in a separate account. However, the account is not required to generate any interest for the tenant unless so provided in the lease.

There have been some interesting consequences when a security deposit is co-mingled with other funds. A tenant may then be entitled to a refund of the entire deposit, regardless of any damage to the apartment or unpaid rent.

Because of the strict nature of these laws, it is extremely important for a landlord to completely adhere to each aspect outlined by the law. A 2001 case illustrates one risk to owners who fail to comply with Article 7 of the GOL. In Klores Associates v Abramoff, 288 A.D.2d 121, 733 N.Y.S.2d 388 (1st Dept. 2001), the owner failed to provide a written notice to the tenant of the banking institution holding the deposit. The court ruled that failure to notify the tenant of the banking institution holding the security deposit was equivalent to the co-mingling of the deposit with personal moneys. As a result, the tenant was entitled to immediate return of the entire deposit. The owner was unable to use the security deposit to repair damages at the end of the lease. The owner had to pay for repairs that should have been covered by the security money.

Even in the case of a building with fewer than six units or a commercial lease, a landlord is required to identify where the security deposit funds are being kept if inquiry is made by the tenant. In the case of Sutton Shopping Center, Inc. v. Robbins MBW Corp. (N.Y.C Civil Ct., Kings County, 1992), a commercial tenant demanded the return of its entire security deposit claiming that it had been co-mingled by the landlord. Since the landlord did not identify where the security deposit was being held, the Court concluded that it had been co-mingled and that the tenant was entitled to recover the entire amount.

Landlords may not even co-mingle a security deposit with other funds related to the same building. In Siegel v. Goldstein, 1 Misc.2d 839 (N.Y.C. Municipal Ct., Bronx, 1955), the tenant was awarded recovery of the entire security deposit when it was not placed into its own separate account, even though the landlord claimed that the account in which it was deposited was exclusively for funds relating to the building.

At the end of the tenancy, a landlord should promptly refund the security deposit to tenant. If a claim is being made by the landlord to retain any portion of the security deposit, an itemized writing of the damages should be presented to the tenant. The GOL requires the security refund be done within sixty days after the tenant vacates.

In summation, all security deposits must be placed in a separate account. The security deposit should never be co-mingled in an account with other funds. If the leased premises is a dwelling unit in a building containing six or more dwelling units, the separate account must be interest bearing, with all interest above the initial 1% belonging to the tenant. A landlord must notify a tenant of the location and amount of the security deposit upon request by the tenant, or without request by the tenant if the dwelling unit is located in a building containing six or more dwelling units.