Holding Deposit / Tenants Backed Out

2 Replies

I'm renting out a SFR in California. I had a young couple apply and pass the screening process. I offered a lease and they accepted. Because the move-in date was still a ways off, I offered to take a holding deposit/fee in lieu of full first month's and security deposit. Rent is $2500. Holding deposit is $1000, an amount which we both agreed was fair. I drafted up a short contract stating the terms and the move-in date. Conditions were that if they backed out of the lease, they'd forfeit a $200 cancellation fee and should move-in day come and I still don't have the unit rented, they pay a pro-rated daily fee for lost rent. If rented before the move-in date, I'd refund the remaining $800.

They backed out. Since then, I've re-marketed the property, made every effort to get it rented and now have new applications coming in. The thing is that the best qualified applicant's move-in date is AFTER the couple's move-in date. I plan to give the new tenant their desired move-in date and simply deduct the lost rent from the holding deposit. I'm also not factoring the $200 cancellation fee into the lost rent, because I consider it a separate charge for my time and energy of having to re-market.

At the end of the day, they broke their contract and should be held to any extent necessary. Although, I have also considered asking the new tenant to "meet me halfway" and move in sooner. Although, neither them or nor I owe the couple that backed out, anything. I've also considered letting the couple know about the expense they'll incur by backing out, and reconsider them as tenants, should they change their minds. But I stopped myself, because I really don't want them as tenants anymore, if they're willing to put me through this.

How would you have handled it? Thanks for the opinions.

If I understand correctly, the potential tenants were made aware of the potential expenses ($200 cancellation fee plus daily prorated rent, starting on their proposed lease start day, until a tenant is found) and signed documents to this effect. From a logical standpoint, your position is reasonable so far.

That said, CA does not have specific, accepted guidelines on holding deposits. Best practices are good documentation and to ensure any fees are "reasonable". Nolo.com states the following should be included in a holding deposit agreement:

  • the amount of the holding deposit
  • your name and that of the applicant
  • the address of the rental property
  • the dates you will hold the rental property vacant
  • the term of the rental agreement or lease
  • 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.

Regarding your $200 cancellation fee, I am not certain it would be considered "reasonable" because my understanding is the fee should be actual losses (loss of potential rent, additional marketing costs, etc.). Regarding your daily prorated rent, since that is an actual loss, you should be fine deducting that from the holding deposit (assuming your documentation is solid).

Hope that all makes sense.

Thanks, Hubert.

Yes, I included all of those stipulations and details you listed out. I must have pulled them from the same literature you did, because they matched up perfectly. I had them sign that contract, as well as the lease.

Good call about the cancellation fee, as I'd like to avoid any legal issues/disputes. The way it's looking now, they'll probably be forfeiting most, if not all, of their deposit through lost rent anyway. I wonder if they would still have backed out if they knew how much this would end up costing them.

Can they change their minds after finding out how much they'd be on the hook for? Can I legally deny them as tenants at that point?