How do you Return/Refund Security Deposit after Second Year?

Question

One of my tenants is coming up on their first lease renewal, so if they decide to stay, it will be the start of their second year. I currently hold 2 months of security deposit for them.

I understand that after the second year you can only hold 1 month of the current rent as security, but I am curious how other landlords or property managers in Pennsylvania handle returning the other half? Do you return the money as a check as soon as they sign the lease, refund the last months rent for the following term, something else?

I appreciate any guidance anyone can provide.

Nathan Gesner · Answer

I would talk to the renter to see what they want to do.

The easiest method is to get tenant's permission to apply the funds toward their next month of rent.

If they prefer the money back, I would issue them a check, money order, or cashier check when they sign the new lease.

Colleen F. · Answer

@Joseph Milano  a check is cleaniest. I don't own property in Pennsylvania but one tip I wanted to give is the face page of all your leases showing pre-paids is helpful. So if you refund this at the same time they sign a new lease it would show on the front page monthly rent x amount, the one month amount deposit x amount, and last month rent x amount if any.  you don t want any questions later that this money is returned

Joseph Milano · Answer

Thanks Colleen that is very helpful, the past few leases I had renewed I used an addendum for any changes such as rent or other terms, and attached the original lease to that for reference. I would feel comfortable enough noting the return in security deposit on the addendum so it is documented and signed.

James Mc Ree · Answer

I believe there was a PA court decision several years ago that now prohibits the "first, last and security deposit" approach. The focus of the case was on "last". The plaintiff argued that "last" is undefined in a lease that automatically renews and effectively represents a 2nd month of security deposit. PA law limits security deposits to 2 months for the first year and 1 month thereafter.

The workarounds are to request 2 months of security plus the first month's rent at lease signing, then refund the 2nd month of security at the 1 year lease anniversary. That is what I do and almost all of my tenants apply the refund to month 13's rent. Another solution is to write 1 year leases with no automatic renewal such that a new lease is required each year instead of automatically going month-to-month. I think the end result is the same, but more work with new leases every year.

Section 8 leases do not allow the 3 months up front payment approach. They only allow the first month and 1 month of security.

Sebastian Bennett · Answer

Got it, I guess it depends on what you perceive as the greater risk, property damage or rent collection. I would personally rather know I have another months rent for the life of the lease.

Joseph Milano · Answer

Thanks for your insight, I have no issue refunding them part of their security deposit towards rent if thats is what they wanted, it would honestly be easier for me. I just wanted to be sure doing something like this wouldn't cause any problems in the future that I am not seeing right now.

Joseph Milano · Answer

I started keeping two months security deposit instead of last months rent so we are better protected from from damages or unpaid rent in case a tenant trashes the place during their first year and the cost exceeds one months wort of rent. To the best of my knowledge you can only use last months rent for the last months rent.

Sebastian Bennett · Answer

Don't most collect first month, last month and security deposit as means of circumventing this rule?

How do you Return/Refund Security Deposit after Second Year?

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