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Security Deposits in NY

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Security Deposits in NY

Postby Anna » Sat Jul 08, 2006 9:02 pm

2005 Civil court decision: primer on security deposits in NY, available on Westlaw & NYSlip.
see also:
http://tenant.net/phpBB2/viewtopic.php?t=1029
http://www.tenant.net/Rights/CTRC/ctrcf006.html
http://www.oag.state.ny.us/realestate/g ... tro.html#6
http://www.oag.state.ny.us/consumer/con ... ssues.html


McMaster v. Pearse
9 Misc.3d 964, 804 N.Y.S.2d 640
NY,2005.
Sep 19, 2005

9 Misc.3d 964, 804 N.Y.S.2d 640, 2005 N.Y. Slip Op. 25387

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the printed Official Reports.

Decided on September 19, 2005
Civil Court of the City of New York, New York County

Mark T. McMaster and MICHELLE D. McMASTER, Plaintiffs,

against

DR. John Pearse and JANINA PEARSE, Defendants.

0512933/04

Diane A. Lebedeff, J.

Plaintiffs seek to recover their security deposit for a residential rental unit. This matter poses the unexpectedly novel issue regarding jointly owned real property of the extent to which each co-owner has individual responsibility and accountability for the proper treatment and potential return of a leasehold security deposit.

In May of 2003, defendant-landlords John and Janina Pearse, husband and wife, rented the second and third floors of a residential building located at 15 East 77th Street, Manhattan, to the plaintiff-tenants, the McMasters. Plaintiffs provided a security deposit of $21,000, which was deposited in a high yield savings account in the name of defendant John Pearse only. In July of 2004, shortly after the tenants vacated, the account was liquidated and there was a refusal to return the security deposit to plaintiffs. Plaintiffs sue to recover the security deposit upon theories of conversion and breach of contract and seek summary judgment on those claims (CPLR 3212).

Defendant John Pearse passed away on June 21, 2005, and his entire interest in the property passed to his wife, co-defendant Janina Pearse. The claims against John Pearse are held in abeyance and not reached herein, for it is well settled that the death of a party stays the action as to the decedent and pending the substitution of a legal representative any determination would be a nullity (see CPLR 1015). Accordingly, the court's consideration is limited to the claims against defendant Janina Pearse.

Security Deposit Statutory Obligation

A landlord's obligation in relation to a security deposit is clearly spelled out in General Obligations Law § 7-103 (1), which provides that security deposits tendered in relation to an "agreement for the use or rental of real property as security ... shall continue to be the money of the person making such deposit or advance and shall be held in trust by the person with whom such deposit or advance shall be made and shall not be mingled with the personal assets of the person receiving the same" (emphasis added).[FN1] The statute's directions are strictly construed (Fore Improvement Corporation v. Selig, 278 F.2d 143, 146 [2d Cir. 1960], the security deposit law "is emphatic in its language and is declarative of the public policy of New York State" and "such statutes frequently have to be literally construed to obtain the desired compliance").

The law's restriction upon a landlord's treatment of a rental security deposit is recognized as a firm and fixed feature of New York landlord-tenant relations (1 Rasch's New York Landlord and Tenant, Including Summary Proceedings § 13:27, Deposit as Trust Fund, "provision of the General Obligations Law requiring security deposits to be placed in a trust account is part of a lease contract as if it had been actually written into it"). Where the landlord abides by the law, the deposit provides security to the landlord against a breach of the lease (Glass v. Janbach Properties, Inc., 73 AD2d 106, 108-109 [2d Dept. 1980], the security deposit law "should not serve to obscure the basic nature of a security deposit. A landlord requires such a deposit, although still the property of the tenant, to attain the status of a protected creditor should the tenant breach the lease" and to serve as "adequate protection should the finances of a tenant falter").

However, just as surely, if the landlord fails to segregate properly a security deposit, or mingles it with personal funds, the law views such as an illegal conversion of the security deposit (Kelligrew v. Lynch, 2 Misc 3d 135[A], 2004 WL 757846, *1 [App. Term,1st Dept. 2004]; LeRoy v. Sayers, 217 AD2d 63 [1st Dept. 1995]; Sommers v. Timely Toys, 209 F.2d 342 [2d Cir. 1954]). In such a case, if tenant has vacated the premises, the right to a refund is immediate and shall not be delayed or postponed until the resolution of a landlord's claim for some or all of the security deposit (LeRoy v. Sayers, supra).[FN2] This right to immediate recovery of a security deposit rests upon fundamental principles explored in the leading case of In re Perfection Technical Services Press, Inc., 22 AD2d 352, 356 (2d Dept. 1965), affd without opinion 18 NY2d 644 (1966), in which the Appellate Division, Second Department, explained:

"[The security deposit law] changed the legal relationship between the [landlord and tenant] from debtor-creditor to trustee-cestui que trust. The inability of the commingling landlord to set off claims against the deposit flows from the change in his legal status. [The landlord] does not owe a debt as he once did; he owes a duty not to commingle the deposit with his own funds. Upon a breach of that duty, he forfeits his right to avail himself of the deposit for any purpose. To allow him to set off the deposit against his individual claims is to treat the deposit as a debt and the landlord as a debtor precisely the situation which [the security deposit law] was enacted to change." (Emphasis added.)

Based upon this clear precedent, the court must reject the request that any right to a refund of the security deposit to these out-of-possession tenants be deferred until the resolution of other outstanding issues.

The plaintiff-tenants here have vacated and, accordingly, the court turns to the issues of (1) whether the record establishes a breach of the obligation to hold a security deposit in trust and not to mingle the deposit with personal assets and (2) if so, and even assuming arguendo that the deceased co-owner may well have been actively responsible for any breach, whether the apparently passive co-owner can be held jointly and severally liable for the obligation to refund the security deposit.

Establishing a Breach of Security Deposit Obligations

As can be discerned from case law, three factors emerge which bear upon a determination of a landlord's breach of statutory obligations concerning maintenance of a security deposit: (1) whether the deposit was held in a segregated account and in the name of the actual landlord; (2) whether the landlord has responded to demands for information regarding the maintenance of the security account, either prior to or during litigation; and (3) whether the landlord complied with the independent duty to give the tenant notice of any depository bank and its address (GOL § 7-103 [2]). It significantly eases analysis to address each factor separately.

First, the title of the security deposit account clearly is of utmost significance. In Ferguson v. Vaughan Imported Cars, Inc., 9 Misc 2d 188 (App. Term, 1st Dept. 1957), addressing Section 233 of the Real Property Law, from which General Obligations Law § 7-103 was derived, the court observed:

"The requirement is not only that the person shall not mingle the money with his own but he shall hold on to it actually or constructively. Placing the money received by the landlord as security in the name of another living person is not a holding within the requirements of this section."

The landlord's duty is to hold the funds in a form which identifies a security deposit as something other than a landlord's personal funds (see Kelligrew v. Lynch, supra, 2004 WL 757846 at *1 [App. Term,1st Dept. 2004], "commingling of a security deposit with a landlord's personal funds is a conversion"; Finnerty v. Freeman, 176 Misc 2d 220, 221-222 [App. Term 2d and 11th J.D. 1998], where landlord placed "security deposit in cash in a sealed envelope" which also contained a signed and witnessed letter avering that the cash was a security deposit "under the circumstances presented here constitutes sufficient compliance with the statutory mandate to hold a tenant's security 'in trust'").

In this instance, it is admitted that the deposit was placed in a savings account bearing only the individual name of one co-owner. This undisputed fact supports a finding of conversion of trust funds.

Second, as to being forthcoming in response to inquiries about the security deposit, any failure to provide complete information on account maintenance supports an inference of commingling (Garfield v. Howard, n.o.r., 2002 WL 31107996, *1 [App.Term 2nd and 11th J.D. 2002], "In view of defendants' failure to respond to plaintiffs' assertion that they had commingled plaintiffs' security deposit with their personal funds and of their failure to notify ... as required by section 7-103(2) of the General Obligations Law, an inference of commingling arose which defendants failed to rebut, entitling plaintiffs to summary judgment for the return of their security deposit"). Indeed, a landlord is best advised to give a complete historical account of the manner in which the funds were treated and the account was maintained if the landlord wishes to defeat a summary judgment motion claiming conversion of a security deposit (LeRoy v. Sayers, supra, 217 AD2d at 68, "In opposing plaintiff's motion on this point defendant has asserted that the funds were deposited in a 'special [bank] account, which I maintain exclusively for the ... property.' This, of course, is not to say that the account did not also contain non-trust funds. Nor does the statement inform us as to how defendant made use of the account during the period in issue").

In this case, the defendant failed to give full information about the account. Defendant Janina Pearse refused to identify the account early in this litigation and, in response to an Interrogatory, objected to disclosure of "confidential financial information" and revealed only the name of bank, but not the bank address, account number, or account name. Even in the face of this summary judgment motion, although providing more information, the defendant has only presented bank statements for the opening and closing months of the claimed security account, which is a far cry from a persuasive accounting for the manner in which these funds were held. The refusal to provide complete disclosure and the scanty showing constitute another failure to rebut an inference of commingling (Garfield v. Howard, supra).

Third, as to the statutory notice regarding security funds deposited in a bank, a separate notice of any depository bank must be given (General Obligations Law § 7-103 [2], "[w]henever the person receiving money so deposited or advanced shall deposit such money in a banking organization, such person shall thereupon notify in writing each of the persons making such security deposit or advance, giving the name and address of the banking organization in which the deposit of security money is made, and the amount of such deposit"). The failure to give the statutory notice gives rise to an adverse inference of commingling (Dan Klores Associates, Inc. v. Abramoff, 288 AD2d 121, 121-122 [1st Dept. 2001], a "showing that defendants failed to give plaintiff written notice of the banking institution that held plaintiff's security deposit ... permitted an inference of commingling at the time of lease expiration, in violation of General Obligations Law § 7-103 [1], that defendants failed to rebut. As a result of such commingling, defendants forfeited any right they had to avail themselves of the security deposit 'for any purpose', entitling plaintiff to its 'immediate' return notwithstanding that plaintiff may itself have breached the lease" [citations omitted]).

In this case, given that the statutory notice was not given, the court must find an adverse inference of commingling arises from the record. Such a determination cannot be defeated by the defendant's argument that this obligation was satisfied because the lease set forth the name of the bank and its address; such a lease provision does not and could not waive the requirement that the statutory notice be given after the deposit is made (G.O.L. § 7-103 [3], "Any provision of ... a contract or agreement whereby a person who so deposits or advances moneys waives any provision of this section is absolutely void"; see LeRoy v. Sayers, supra, 217 AD2d at 68-69, "the stamped name of the bank on the back of the cancelled checks do[es] not qualify as notice in writing"; see also, as to statutory notice, Shandwick USA, Inc. v. Exenet Technologies, Inc., 192 Misc 2d 280 [Civ. Ct. NY Co. 2002, Rakower, J.]).

Here, all factors support a finding that defendant actively or passively breached the obligation to maintain in trust a security deposit under the name of the co-owners.

A Co-Owner's Obligation for Security Deposit Trust Funds

As to the question of the co-owner's responsibility for statutory compliance, as previously detailed, the obligation is to hold the security deposit as a trustee. As a general principle, "a trustee in New York is held as much accountable for damage to the trust by reason of negligent inaction as for affirmative wrongdoing" (Matter of Will of Goldstick, 177 AD2d 225, 238 [1st Dept. 1992], mod on rearg 183 AD2d 684 [1st Dept. 1992]).

In this case, the property was leased jointly by the two named defendants, with both names appearing on the lease as lessors.[FN3] No argument is raised to defeat the observation that each co-owner bears the obligations of a co-trustee in relation to a security deposit. A co-trustee "may delegate the exercise of a trust power to a fellow trustee, especially where the latter has an expertise in some particular aspect of the trust management [citation omitted]; but that does not give a trustee the right to abdicate [the] duty to be personally 'active in the administration of the trust'"(id.; Bogert, Trusts, § 92, p. 331 [6th ed.]; see 90A C.J.S. Trusts § 380 Form or Manner of Deposit, a trustee "may not deposit [funds] in his or her own name as an individual, or in any name other than that of the trust or in his or her name as trustee, or commingle the trust account with his or her own in the bank or depositary. If he or she does, it constitutes a conversion of the fund for which he or she is liable").

Nor is there any argument available that the marital or spousal relationship between the co-owners varied the obligations of Janina Pearse, who was a married woman at the time of the critical events. Under General Obligations Law § 3-301, a married woman's marital status is irrelevant to contractual obligations, and subdivision (1) thereof provides that "[a] married woman has all the rights in respect to property ... and to make contracts in respect thereto with any person, including her husband, ... and be liable on such contracts, as if she were unmarried." A married woman's economic emancipation and independent rights and obligations in relation to real property have long been recognized under New York Law (see Laws 1848, ch. 200, § 3, as amended by Laws 1849, ch. 375, known as the "Married Women's Property Act," and, generally, Richard H. Chused, Richard, Married Women's Property Law, 1800 - 1850, 71 Georgetown L.J. 1359 [1983], and History's Double Edge: A Comment on Modernization of Marital Status, 82 Georgetown L.J. 2213 [1994], with the latter observing that such enactments followed shortly after the notable Seneca Falls Convention of 1848 and were only partially based upon suffrage and feminist theories then being advanced). And, of course, to the extent the wife designated the husband as her agent for the treatment of the security deposit, she cannot escape liability (45 N.Y.Jur.2d Domestic Relations § 271, Managing Wife's Business, "Pursuant to the power vested in married women to carry on a trade, business, or occupation, a married woman may designate her husband as her agent to manage her trade, business, or occupation, and to purchase property therefor. Where she does so she becomes legally liable for the acts of her husband as such agent, the same as though the marital relation did not exist" [footnotes omitted]).

It remains true that a landlord renting real property in New York has an unwavering and absolute obligation to comply with the laws relating to security deposits. The obligation here is consistent with general principles of New York law which do not permit a co-fiduciary to claim exemption from responsibility based upon passivity, ignorance of the law, or even the contrary advice of counsel (see, Matter of Rothko, 43 NY2d 305, 320 [1977], a co-fiduciary "who knows that [another co-fiduciary] is committing breaches of trust and not only fails to exert efforts directed towards prevention but accedes to them is legally accountable even though ... acting on the advice of counsel").

Accordingly, no argument has been presented which would defeat the right of plaintiffs to recover the security deposit from the co-owner who stands before the court.

Conclusion

The standard for evaluating motions for summary judgment is well-established. "To obtain summary judgment it is necessary that the movant establish [a] cause of action or defense 'sufficiently to warrant the court as a matter of law in directing judgment' in [movant's] favor (CPLR 3212, subd. [b]), and [movant] must do so by tender of proof in admissible form" (Friends of Animals v. Assoc. Fur Mfrs., 46 NY2d 1065, 1067 [1979]). The plaintiffs have met their burden and the motion for summary judgment is granted.

Plaintiffs are awarded judgment against defendant Janina Pearse on the cause of action for conversion in the amount of $21,000. The calculation of interest thereon, and the balance of the claims, are severed and shall continue. Costs and disbursements shall be held in abeyance to abide the event.

This decision constitutes the order of the court.

Dated: September 19, 2005

______________________

J.S.C.
Footnotes

Footnote 1:For a history of the New York treatment of security deposits, see Park Holding Co. v. Johnson, 106 Misc 2d 834, 835-837 (Civ. Ct. NY Co. 1980, Dankberg, J.), which tracks the changes from the common law view as set forth in Matter of Atlas v. Moritz, 217 App.Div. 38, 42 (4th Dept. 1926), through the 1935 enactment of R.P.L. § 733, and the re-enactment and re-codification of substantially similar provisions in General Obligations Law § 7-103. For a review of the nationwide status of security deposit laws, see John P. Ludington, Landlord-Tenant Security Deposit Legislation, 63 A.L.R.4th 901.

Footnote 2:If the tenant remains in possession and has not sued to recover the deposit, a landlord has the opportunity to cure (Milton R. Friedman, Friedman on Leases § 20.4 Nature of Security Deposit Statutes, at 1291 [4th Ed. 1997 PLI], "Commingling by landlord is a conversion, which gives tenant an immediate right to recover the deposit without offset by reason of any claim by landlord. Landlord's right to the security is revived if the commingling ceases before tenant brings an action to recover the deposit. But segregation after expiration of the term and vacation by tenant is held too late for such revival" [footnotes omitted]; see, as to bankruptcy treatment, In re Spinelli, 36 B.R. 819, 821 [ Bnkr. E.D.N.Y.1984], "However, if a landlord restores and segregates the once-commingled funds prior to bankruptcy or prior to an action having been commenced for the conversion, the statutory 'trust' may be reinstated, and the tenant or trustee in bankruptcy will no longer possess a cause of action for the conversion").

Footnote 3:The deed has not been presented, but both defendants are named as lessors, indicating co-ownership of the property. There is no evidence as to whether the joint ownership was in the form of a joint tenancy, a tenancy in common, or a tenancy by the entirety (see, 24 NY Jur. 2d Cotenancy § 1).
Anna
 
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Postby Aubergine » Sat Sep 09, 2006 3:45 pm

New York Practice Series - Landlord and Tenant Practice in New York -- Daniel Finkelstein; Lucas A. Ferrara

Chapter 7. Security Deposits

I. New York General Obligations Law
§ 7:1. Generally
§ 7:2. “Security deposit,” defined
§ 7:3. --Security deposit is not rent
§ 7:4. --Security deposit is a “substantial obligation of the tenancy”
§ 7:5. -- --Landlord’s application of security deposit to rent arrears may not cure default
§ 7:6. Security deposit, formerly treated as debt, is now held in trust
§ 7:7. Landlord’s claim to security deposit given priority over other creditors
§ 7:8. Commingling of funds prohibited
§ 7:9. --Deposit of security funds into interest-bearing account not always required
§ 7:10. --Commingling constitutes conversion and may entitle tenant to immediate refund of security deposit
§ 7:11. --Commingling may be corrected
§ 7:12. --Tenant’s breach of lease does not relieve landlord of its duty to maintain segregated security deposit account
§ 7:13. --Example: landlord must return commingled security deposit even when tenant has allegedly repudiated lease
§ 7:14. --Landlord may use security deposit to offset damages
§ 7:15. -- --Any excess must be returned to tenant
§ 7:16. Transfer of security deposits upon conveyance of real property
§ 7:17. --New owner generally assumes liability when security deposits are transferred
§ 7:18. -- Failure to transfer is misdemeanor
§ 7:19. -- Express conveyance of security deposits required
§ 7:20. Refund of security deposit upon termination of tenancy
§ 7:21. --Refund of security when stipulation of settlement is silent
§ 7:22. --Effect of constructive eviction
§ 7:23. --Effect of breach of warranty of habitability
§ 7:24. Landlord entitled to offsets against security deposits
§ 7:25. --Security deposit can serve as offset only to extent of damages
§ 7:25.50. -- --Accord and satisfaction
§ 7:26. --Tenant may not offset rent arrears against security deposit
§ 7:27. --Tenant may not offset rent arrears against security deposit--Interest owed on security monies no defense to rent nonpayment
§ 7:28. --Tenant may not offset rent arrears against security deposit--Accrued interest on security deposit need not be applied to supplemental security owed by tenant
§ 7:29. --Tenant may not offset rent arrears against security deposit--An exception exists when lease and statutory requirements are violated
§ 7:30. “Prepaid rent” must also be held in trust
§ 7:31. --Example: prepaid rent must be transferred to receiver

II. Additional Rules for Residential Security Deposits
§ 7:32. Generally
§ 7:33. Security deposit must be held in an interest-bearing account in a New York state bank
§ 7:34. --Exception: fewer than six dwelling units
§ 7:35. --Written notice to tenant required
§ 7:36. -- --Effect of violation of notice provisions
§ 7:37. --Landlord entitled to administrative fee
§ 7:38. --Annual interest payments
§ 7:39. --Attorney General has standing to sue
§ 7:40. Liability of new landlord for security deposits of non-rent-stabilized tenants: GOL 7-108
§ 7:41. --Liability not absolute; “actual knowledge” of security deposit required
§ 7:42. -- -- “Actual knowledge,” defined
§ 7:43. --New landlord must notify tenant when there is no record of security deposit
§ 7:44. -- --Purchaser can demand escrow account from seller
§ 7:45. Additional restrictions on security deposits of rent-controlled tenants
§ 7:46. --Maximum amount of security deposit
§ 7:47. --Deposit in interest-bearing New York State bank account required; one-percent administrative fee permitted
§ 7:48. --Liability of new landlord for security deposits of rent-controlled tenants
§ 7:49. --Collection of excess security deposit constitutes rent overcharge
§ 7:50. Additional restrictions on security deposits of rent-stabilized tenants
§ 7:51. --Amount of security deposit generally limited to one month’s rent
§ 7:52. -- -- Exception: larger deposit on base date
§ 7:53. -- --Exception: no security deposit upon lease renewal when none collected initially
§ 7:54. --Tenant’s options regarding disbursement of interest
§ 7:55. --Administrative fee
§ 7:56. --Deposit in a New York State bank
§ 7:57. --Liability for security deposit upon conveyance of property
§ 7:58. -- --Receiver’s liability is limited
§ 7:59. -- --Waiver of benefit void
§ 7:60. -- --Effective date
§ 7:61. -- “Rent Stabilization Lease Rider” must state security deposit rules
§ 7:62. --DHCR can decide excess security deposit claim
§ 7:63. Security deposit protection for manufactured-home park tenants
§ 7:64. Provision of security deposit for tenants receiving public assistance

III. Compare: “Deposit” Pending Approval of Tenant
§ 7:65. Withdrawal of offer prior to landlord’s acceptance

I. New York General Obligations Law

§ 7:1. Generally

Article 7 of New York State’s General Obligations Law, (“GOL”), is the statute that governs security deposits. The law’s intent is to safeguard a tenant’s interests in these proceeds.[FN1] While differing protections and limitations exist, residential and commercial landlords are unequivocally required to maintain a separate account for security deposits. These monies cannot be commingled with the landlord’s personal funds.[FN2] Any provision of a lease or rental agreement which attempts to waive the protections of the statute is “absolutely void.”[FN3]

[FN1] In re Pal-Playwell, Inc., 334 F2d 389 (2d Cir 1964); In re Spinelli, 36 BR 819 (Bankr ED NY 1984) (GOL 7-103 “was enacted to protect a tenant from misappropriation of funds deposited as security with his landlord.”).

[FN2] GOL 7-103; see §§ 7:6 and 7:8.

[FN3] GOL 7-103 (3); see State v Wolowitz, 96 AD2d 47 (2d Dept 1983) (The court found that based on GOL 7-103 (3) (a) a “lease term which states that interest on security will be returned at the lease’s expiration, without specifically offering to the tenant the choice of the other alternatives set forth in the statute ... operates as a waiver” and “was void as a matter of law.”).

§ 7:2. “Security deposit,” defined

A “security deposit” is the consideration advanced on a lease or license agreement and is held by the lessor or licensor to ensure an occupant’s full performance of the terms and conditions of the underlying contract.[FN1] Security will generally consist of the deposit of monies (or other consideration), in an amount perceived to be sufficient to afford the tenant an incentive to fulfill its obligations and to safeguard the lessor’s or licensor’s interest in the premises.[FN2] However, for rent-regulated tenants, the maximum amount of the security deposit is generally restricted to one month’s rent.[FN3]

[FN1] GOL 7-103 (1).

[FN2] See, e.g., Markowitz v Landau, 171 AD2d 564 (1st Dept 1991) (Tenant who failed to post $10,000 security deposit could not assign lease because the “furnishing of the security deposit is a substantial obligation of the tenancy” and the assignment could only be effective if the defendant-tenant “were not in default at the time of the assignment.”); Louis R. Morandi, P.C. v Charter Management Co., 159 AD2d 422, 166 AD2d 286 (1st Dept 1990) (“It is clear that defendant, in the consent to the assignment, explicitly reaffirmed all of the terms and conditions of the original lease, including the provision for the reduction of the security deposit at the end of the fifth year” from $50,000 to $15,000.); Grays v Brooks, 148 Misc 2d 646 (City Civ Ct 1990) (Security deposit held by the landlord after a warrant of eviction was issued and defendants had vacated was equal to two months rent.) equal to two months’ rent).

[FN3] See §§ 7:46 and 7:51.

§ 7:3. “Security deposit,” defined--Security deposit is not rent

A security deposit is usually a lump sum deposit made and held as security for performance of the contract.[FN1] In contrast, rent is consideration which is commonly remitted in monthly installments and which is proffered in exchange for the privilege to use and occupy space. The obligation to pay rent is distinct from the obligation to make a security deposit.[FN2]

[FN1] See § 7:2.

[FN2] See Yasuda Trust and Banking Co. v Carven Assoc., NYLJ, 6/28/95, at 29, col 3 (Sup Ct, NY County); Paramount Group v Guardian 30th St. Corp., NYLJ, 1/15/92, at 23, col 2 (Civ Ct, NY County); Park Holding Co. v Johnson, 106 Misc 2d 834 (City Civ Ct 1980) (“[M]oney to be given under a lease security deposit clause is not ‘rent.”‘).

§ 7:4. “Security deposit,” defined--Security deposit is a “substantial obligation of the tenancy”

Payment of a security deposit has been held to be a “substantial obligation of the tenancy.”[FN1] Accordingly, a tenant’s failure to furnish a lawful security deposit, or to maintain the security account throughout the term of the lease, can trigger the commencement of a holdover proceeding. Since the proceeds are not “rent,”[FN2] they may not be recovered by way of a nonpayment proceeding.[FN3]

[FN1] See Markowitz v Landau, 171 AD2d 564 (1st Dept 1991) (“The furnishing of the security deposit is a substantial obligation of the tenancy, as it provides a fund from which the landlord can draw for unpaid rent or damages and which puts the landlord into the status of a secured creditor.”); Park Holding Co. v Johnson, 106 Misc 2d 834 (City Civ Ct 1980); see also Ch 4 and Ch 15 for a further discussion of the substantial obligations of a tenancy.

[FN2] See § 7:3.

[FN3] Park Holding Co. v Johnson, 106 Misc 2d 834 (City Civ Ct 1980) (“[M]oney to be given under a lease security deposit clause ... cannot be recovered by the landlord by a Housing Part nonpayment summary proceeding.”); see also Atlas v Moritz, 217 App Div 38 (4th Dept 1926).

§ 7:5. “Security deposit,” defined--Security deposit is a “substantial obligation of the tenancy”--Landlord’s application of security deposit to rent arrears may not cure default

A tenant in default in the payment of rent is not entitled to have the deposit applied to its nonpayment so as to cure the default. Thus, when a garage tenant defaulted on over $250,000 in rent payments and when the landlord withdrew or “drew down” $200,000 from a letter of credit held as security, the court concluded that the draw-down did not constitute an acceptance of “rent” that vitiated the notice to cure and termination notice served in that case.[FN1]

[FN1] Paramount Group v Guardian 30th St. Corp., NYLJ, 1/15/92, at 23, col 2 (Civ Ct, NY County); but see Love Lori, Inc. v Love 85th Street Pharmacy, Inc., NYLJ, 3/20/98, at 25, col 3 (App Term, 1st Dept) (Petitioner’s commingling of the funds and failure to notify tenant of the name of the banking organization where the deposit was held entitled the tenant to the recovery of its security by way of a “setoff against petitioner’s judgment for rent.”).

§ 7:6. Security deposit, formerly treated as debt, is now held in trust

Originally, a security deposit was treated as a “debt” owed by the landlord to the tenant.[FN1] To prevent the unjust or premature depletion of the proceeds, the state legislature modified this relationship, placing the landlord in the position of a “trustee.” The current governing statute,[FN2] derives from the original security deposit law enacted in 1935.[FN3] By statute, a landlord is forbidden from combining the security deposit with personal funds,[FN4] and such commingling entitles the tenant to immediate recovery of the proceeds.[FN5]

[FN1] See Mallory Assoc., Inc. v Barving Realty Co., Inc., 300 NY 297 (1949) (“Prior to the enactment of [GOL 7-103] ... it was uniformly held that a deposit of a security by a tenant under a lease created a debtor-creditor relationship.”).

[FN2] GOL 7-103

[FN3] Former Real Property Law § 233; see, generally, LeRoy v Sayers, 217 AD2d 63 (1st Dept 1995) (discussing the history of the landlord-tenant relationship with respect to security deposits); Glass v Janbach Properties, Inc., 73 AD2d 106 (2d Dept 1980); In re Perfection Technical Services Press, Inc., 22 AD2d 352 (2d Dept 1965), affd 18 NY2d 644 (1966).

[FN4] GOL 7-103 (1); Real Property Law § 233.

[FN5] See § 7:10; Pollack v Springer, 195 Misc 523 (City Ct 1949), mod 196 Misc 1015 (App Term 1949) (An “action in conversion” can be used to recover a security deposit that has been commingled with the landlord’s funds.).

§ 7:7. Landlord’s claim to security deposit given priority over other creditors

Although the monies remain the property of the tenant and are held in trust, by demanding such funds, a landlord secures the status of a “protected creditor” should the tenant subsequently breach or otherwise fail to conform to the requirements of the lease. A landlord’s claim to a tenant’s security deposit is thus afforded priority over claims of the tenant’s general creditors. The landlord’s right to offsets will even take precedence over a bankruptcy trustee’s claim to the proceeds.[FN1] In effect, the security is intended to provide the landlord with “adequate protection” should the tenant’s finances subsequently falter.[FN2] The deposit remains the property of the tenant until there has been a default or breach of a covenant of the lease, at which time the landlord may dispose of the proceeds in accordance with the agreement’s terms.[FN3]

[FN1] In Re Pal-Playwell, Inc., 334 F2d 389 (2d Cir 1964) (When the landlord complied with the statutory requirements regarding lease security deposits it was “entitled to set-off the security deposit” even when the tenant was in bankruptcy.); see generally Ch 20.

[FN2] Glass v Janbach Properties, Inc., 73 AD2d 106 (2d Dept 1980); see also Markowitz v Landau, 171 AD2d 564 (1st Dept 1991) (“The furnishing of a security deposit ... puts the landlord into the status of a secured creditor.”); see generally § 7:24; Ch 20.

[FN3] GOL 7-103 (1); State by Lefkowitz v Parker, 67 Misc 2d 36 (Sup 1971), revd on other grounds, 38 AD2d 542 (1st Dept 1971), affd 30 NY2d 964 (1972); see also Glass v Janbach Properties, 73 AD2d 106 (2d Dept 1980).

§ 7:8. Commingling of funds prohibited

In its capacity as a trustee, a landlord is prohibited from combining the tenants’ security funds with personal monies.[FN1] With the exception of the administrative fee,[FN2] the security deposit remains the tenant’s property, and upon termination of the lease is to be returned to the tenant, provided all of the terms and conditions of the agreement have been satisfactorily performed.[FN3]

[FN1] GOL 7-103 (1); see generally Kelligrew v Lynch, 2 Misc 3d 135(A), 2004 NY Slip Op 50220(U) (App Term, 9th & 10th Jud Dists 2004) (“A tenant’s failure to comply with the terms of a lease is not a defense to a landlord’s breach of the duty not to commingle the deposit with personal funds.”).

[FN2] See §§ 7:37, 7:47, 7:55.

[FN3] Glass v Janbach Props., Inc., 73 AD2d 106 (2d Dept 1980) (“Despite the depositor’s continued ownership, it is an ownership burdened by the landlord’s right to hold and use the money when required to secure performance.”).

§ 7:9. Commingling of funds prohibited--Deposit of security funds into interest-bearing account not always required

The General Obligations Law requires that a tenant’s security deposit be placed in an interest-bearing account in a New York State bank only when the rented property contains six or more dwelling units.[FN1] Regulations governing rent-controlled and rent-stabilized tenancies (which may include properties with fewer than six dwelling units), also similarly require security funds to be held in interest-bearing accounts.[FN2]When a landlord voluntarily places a tenant’s security deposit in an interest-bearing account, even in the absence of any legal or contractual requirement to do so, the landlord may be required to remit all accrued interest to the tenant.[FN3]

[FN1] GOL 7-103 (2-a); see §§ 7:33 and 7:34.

[FN2] See §§ 7:47 and 7:56.

[FN3] Stuarco, Inc. v Slafbro Realty Corp., 30 AD2d 80 (2d Dept 1968). (“In short, the plaintiff tenant is entitled to the interest actually accrued on the $4,800 by operation of law, despite the absence of any agreement to pay interest on the deposit, and this precisely and only because interest was in fact earned thereon”).

§ 7:10. Commingling of funds prohibited--Commingling constitutes conversion and may entitle tenant to immediate refund of security deposit

While GOL 7-103 does not provide any specific penalty or sanction for a landlord’s commingling of a tenant’s security deposit with personal monies, such misconduct may constitute a “conversion” which entitles the tenant to immediate recovery of the proceeds.[FN1]

[FN1] Sommers v Timely Toys, Inc., 209 F2d 342 (2d Cir 1954) (Absent a landlord correcting a prior commingling of security deposit and personal monies “the cases are clear that ... the lessor has worked a conversion and the lessee is entitled to immediate recovery.”); Dan Klores Assoc., Inc. v Abramoff, 288 AD2d 121 (1st Dept 2001); LeRoy v Sayers, 217 AD2d 63 (1st Dept 1995) (Once a landlord commingles his personal funds with a security deposit “he forfeits his right to avail himself of the deposit for any purpose.”); State of New York v Thwaites Place Assoc., 155 AD2d 3 (1st Dept 1990); Garfield v Howard, 2002 NY Slip Op 40422(U) (App Term, 2d & 11th Jud Dists 2002); see also Moorehead v Mastrangelo, NYLJ, 5/21/97, at 32, col 2 (City Ct, White Plains, Westchester County).

§ 7:11. Commingling of funds prohibited--Commingling may be corrected

A “mere” commingling of the proceeds has been held insufficient to trigger a forfeiture when the misappropriation is subsequently corrected.[FN1] In one case, the court concluded that “‘merely commingling in violation of a statutory provision against mingling does not justify a recovery.”‘[FN2] Thus, when remedied, a prior commingling will not constitute a “conversion.”[FN3]

[FN1] Tow v Maidman, 56 Misc 2d 468 (Sup Ct 1968) (“The essence of the tort of conversion is not the mere exercise of some dominion over the property of another but such an exercise causes some real detriment to the right of the owner of the thing over which dominion is exercised.”); Shandwick USA, Inc. v Exenet Technologies, Inc., 192 Misc 2d 280 (City Civ Ct 2002); Purfield v Kathrane, 73 Misc 2d 194 (City Civ Ct 1973) (“Where at the time of trial the deposit was intact and the person making the deposit was in possession, it has been decided that, despite such commingling, there is no conversion and, consequently, there can be no recovery of the deposit.”).

[FN2] Tow v Maidman, 56 Misc 2d 468, 470 (Sup Ct 1968).

[FN3] Purfield v Kathrane, 73 Misc 2d 194 (City Civ Ct 1973).

§ 7:12. Commingling of funds prohibited--Tenant’s breach of lease does not relieve landlord of its duty to maintain segregated security deposit account

A tenant’s alleged noncompliance with the terms of a lease will not serve as a defense to a landlord’s commingling of the funds.[FN1]

[FN1] Matter of General Assignment for the Benefit of Creditors of Perfection Technical Services Press, Inc., 18 NY2d 644 (1966).

§ 7:13. Commingling of funds prohibited--Example: landlord must return commingled security deposit even when tenant has allegedly repudiated lease

In one case, a tenant signed a summer-house lease and paid a security deposit in February for a lease term to commence on July 1. In March, a fire substantially damaged the house. Because of the conditions extant, the tenant repudiated the lease and demanded the return of the security deposit. The landlord refused the refund, claiming that the tenant had breached the parties’ agreement. While the issue of contract breach was found to require a trial, the Appellate Division, First Department, determined that since the landlord had violated the statutory obligation to maintain the security monies in a segregated account the tenant was entitled to the immediate return of the proceeds.[FN1]

[FN1] LeRoy v Sayers, 217 AD2d 63 (1st Dept 1995) (“[T]here is no merit to defendant’s argument that plaintiff’s alleged repudiation of the lease agreement ‘relieved [him] of any obligation to maintain [advance] rent and security deposits in a segregated account.”‘); see GOL 7-103 (2), 7-105 (3); see also Sommers v Timely Toys, Inc., 110 F Supp 844 (ED NY 1953); Hartzell v Burdick, 91 Misc 2d 758, 760 (City Ct 1977) (Since the landlord breached the lease by commingling personal funds with the tenant’s security deposit, tenant “was under no obligation to comply with [the lease], was free to remove at any time, and incurred no liability for so doing.”).

§ 7:14. Commingling of funds prohibited--Landlord may use security deposit to offset damages

In the event of a tenant’s default, the security deposit may be used by the landlord to offset actual damages sustained or may serve as liquidated damages if reserved by the parties’ lease.[FN1]

[FN1] Rivertower Assoc. v Chalfen, 153 AD2d 196 (1st Dept 1990); Finnerty v Freeman, 176 Misc 2d 220 (App Term 1998) (“The proper measure of damages is the actual value of the items, to be determined by taking into account ... the original cost of the articles, [along with such] other factors including the extent to which the items have deteriorated or depreciated through use and damage and evidence of present reasonable value.”).

§ 7:15. Commingling of funds prohibited--Landlord may use security deposit to offset damages--Any excess must be returned to tenant

When disproportionate to the damage sustained, any excess monies must be returned to the tenant.[FN1]

[FN1] LeRoy v Sayers, 217 AD2d 63 (1st Dept 1995); Prudential Westchester Corp. v Tomasino, 5 AD2d 489 (1st Dept 1958), affd 6 NY2d 824 (1959).

§ 7:16. Transfer of security deposits upon conveyance of real property

Under the General Obligations Law, all security deposits held by an owner (or lessor), of real property must be transferred to the new owner (or assignee), within five days of the sale or conveyance of the property.[FN1] In the event of a foreclosure, the landlord is obligated to transfer all security deposits to the new owner, whether the transferee is a foreclosing bank, an independent buyer, or a judicially appointed receiver.[FN2]

[FN1] GOL 7-105 (1); see, e.g., State of New York v Thwaites Place Assoc., 155 AD2d 3 (1st Dept 1990) (The court held that the tenants, as the ultimate purchasers of the units, were entitled to the security deposits which the landlord had withheld from a judicially appointed receiver in violation of GOL 7- 105.); Mogol v Kramer, 98 Misc 2d 1023 (County Ct 1979) (Held that a landlord must relinquish security deposit to assignee.).

[FN2] GOL 7-105 (1); see, e.g., State of New York v Thwaites Place Assoc., 155 AD2d 3 (1st Dept 1990).

§ 7:17. Transfer of security deposits upon conveyance of real property--New owner generally assumes liability when security deposits are transferred

Once the security deposit has been transferred, the new owner is responsible for holding the funds in accordance with the requirements of law,[FN1] and is charged with returning the deposit to the tenant at the appropriate time. The owner or other grantor which transferred the security deposit funds is absolved of further responsibility, unless the tenant’s lease agreement provides otherwise.[FN2]

[FN1] cf. Matter of Central Sav. Bank v Fashoda, Inc., 94 AD2d 927 (3d Dept 1983), affd 62 NY2d 721 (1984) (landlord’s successor in interest not liable to tenant for security deposit which prior landlord never relinquished).

[FN2] GOL 7-105 (2).

§ 7:18. Transfer of security deposits upon conveyance of real property-- Failure to transfer is misdemeanor

Failure to relinquish security deposits made by tenants or licensees, or to properly notify the depositors of a transfer, may constitute a misdemeanor. [FN1] As a defense, a landlord may assert that it no longer possesses the funds and that they were used in a manner contemplated by the lease agreement. [FN2]

[FN1] GOL 7-105 (3).

[FN2] People v Elliott, 65 NY2d 446 (1985) (Landlord violated the statute when the lease provided that only half of security deposit funds could be used to pay for building repairs but entire fund was used for that purpose. Here the defense was not available to the landlord when he failed to return the excess funds to the tenant pursuant to the lease.).

§ 7:19. Transfer of security deposits upon conveyance of real property-- Express conveyance of security deposits required

The conveyance of the leased property, or the simple assignment of a leasehold interest, will not result in a transfer of the security deposit.[FN1]

[FN1] See, e.g., Shattuck v Buek, 158 App Div 709 (1st Dept 1913); Purfield v Kathrane, 73 Misc 2d 194 (City Civ Ct 1973) (Assignment of a lease without specific reference to security deposit does not pass title to the proceeds.); cf. Keusch v Morrison, 145 Misc. 740 (City Ct 1932) (A mortgage which expressly covered “appurtenances and all estates and rights of mortgagor” included security deposits since security constituted “property” under Real Property Law § 272. The court reasoned that the security deposit passed with the conveyance because “here the question concerns the mortgage of a lease and not an assignment.”).

§ 7:20. Refund of security deposit upon termination of tenancy

When a tenant vacates the premises upon lease termination, the landlord is obligated to return the full amount of the security deposit, plus interest accrued thereon, provided that the tenant has fully complied with all of the terms and conditions of the lease, including payment of all the rent and delivery of possession of the premises to the landlord status quo ante (ordinary “wear and tear” excepted).[FN1] The interest payable to the tenant is determined by the rates offered by the banking institution where the proceeds were deposited.[FN2] If the tenancy is terminated in advance of the time when the bank would regularly pay interest, the landlord need only pay to the tenant such interest which has accrued as of the lease termination date. [FN3] In the event that the tenant has failed to make all rent payments during the term of the lease, and the landlord has applied the security deposit toward the payment of rent, or for use and occupancy of the premises, the tenant will not be entitled to a refund of the deposit unless the proceeds are in excess of the rent due or damages sustained.[FN4]

[FN1] Farago v Burke, 262 NY 229 (1933) (“The law makes the depositary a trustee for both parties; it imposes on him a duty not to deliver the escrow to any one except upon strict compliance with the conditions imposed. ...”).

[FN2] See GOL 7-103 (2).

[FN3] GOL 7-103 (2-b).

[FN4] Reznick v South Side Const. Co., 166 NYS 748 (App Term 1917); see §§ 7:15 and 7:24.

§ 7:21. Refund of security deposit upon termination of tenancy--Refund of security when stipulation of settlement is silent

In the absence of an express disposition, a presumption exists that the tenant will be entitled to the return of its security deposit upon vacatur. For example, when a commercial landlord and tenant entered into a court-ordered settlement of a holdover proceeding, and when the stipulation was silent as to the status of the security deposit, the tenant was deemed entitled to recovery of the proceeds upon vacatur.[FN1]

[FN1] A & R Accurate Machine v Marino, NYLJ, 1/31/92, at 26, col 6 (App Term, 9th & 10th Jud Dists) (a separate action is required to recover security monies not encompassed or addressed by the parties’ stipulation of settlement).

§ 7:22. Refund of security deposit upon termination of tenancy--Effect of constructive eviction

When a tenant is effectively deprived of the use of all or part of a leased premises due to fire, condemnation, or other circumstances, and abandonment of the premises results, a landlord is obligated to return all security proceeds to the tenant.[FN1]

[FN1] See Dinerstein v 635 Ninth Ave. Corp., 2003 NY Slip Op 51252(U) (App Term, 1st Dept 2003) (“The lack of a functioning kitchen, persistent electrical and plumbing problems, and the presence of intolerable dust” comprised a constructive eviction and warranted the return of tenants security deposit.); Yochim v McGrath, 165 Misc 2d 10 (City Ct 1995) (Defendant’s breach of the covenant of quiet enjoyment, and the tenant’s subsequent vacatur, subjects the defendant to “all appropriate damages flowing therefrom.”); Joseph v Lidsky, 34 Misc 2d 606 (Mun Ct 1962) (since the owner of adjoining land extended construction on its property and blocked tenant’s windows, causing a building code violation and forcing tenant’s vacatur, tenant was entitled to return of security deposit but not damages since tenant was not constructively evicted by her own landlord); see Ch 14.

§ 7:23. Refund of security deposit upon termination of tenancy--Effect of breach of warranty of habitability

Similarly, when there is a breach of the warranty of habitability, such that a premises become uninhabitable, the tenant may demand the return of the security deposit and any accrued interest.[FN1]

[FN1] Jimenez v Myers, 2002 NY Slip Op 50613(U) (App Term, 9th & 10th Jud Dists 2002) (“Plaintiff’s internally consistent and generally unrebutted testimony as to the apartment’s condition at the outset of the tenancy supports the court’s determination that defendant breached substantial terms of the lease including her duty to provide plaintiff a habitable premise. ... The breach justified plaintiff’s refusal to take possession and entitled him to a plenary action for the return of the rents already paid and the security deposit.”); Lyons v Siino, NYLJ, 4/23/92, at 27, col 2 (App Term, 2d Dept); see also Ch 9.

§ 7:24. Landlord entitled to offsets against security deposits

In certain situations, the landlord may be entitled to offsets against a security deposit. Generally, when there is a written lease, the document will outline specific conditions under which the landlord is entitled to retain all or part of the security funds. For instance, the lease may permit the landlord to apply such monies against any claim of damage to the premises, unpaid rent, or other charges due to the landlord pursuant to the contract (e.g., “additional rent”).[FN1] In addition, in the event of a breach or default by the tenant, the landlord may be able to retain the security deposit as liquidated damages if the lease agreement so provides and the proceeds retained are reasonably related to the losses sustained.[FN2]

[FN1] See, e.g., Glass v Janbach Props., Inc., 73 AD2d 106 (2d Dept 1980) (The landlord has the right to apply a security deposit “whenever necessary to insure fulfillment of the lessee’s contractual obligations.”).

[FN2] See, e.g., LeRoy v Sayers, 217 AD2d 63 (1st Dept 1995) (“The rule has evolved that a liquidated damages clause will be enforced if the sum stated is reasonably proportionate to the loss anticipated and the amount of actual loss would be difficult if not impossible to calculate.”).

§ 7:25. Landlord entitled to offsets against security deposits--Security deposit can serve as offset only to extent of damages

A security deposit may be retained “only to the extent of damages sustained” by the landlord. The balance, if any, “must be returned” to the tenant.[FN1]

Practice Pointer:

Before refunding or applying a security deposit, a landlord must carefully review the provisions of the lease to ascertain the appropriate rights and available mechanisms. Upon a vacatur, a landlord should inspect the leased premises to ascertain the nature and extent of any damage. If repairs are found to be warranted, the landlord should secure appropriate estimates for the repair work and forward notice of the damage and application of the deposit in a writing to the tenant. To best support the damage claim, photographs of the space should be taken before and after the tenant’s occupancy.

[FN1] Prudential Westchester Corp. v Tomasino, 5 AD2d 489 (1st Dept 1958), affd 6 NY2d 824 (1959); see, e.g., Finn v Schwartz, 4 Misc 3d 130(A), 2004 NY Slip Op 50688(U) (App Term, 2d & 11th Jud Dists 2004) (“Furthermore, while defendants argue that they are entitled to retain plaintiff’s security deposit due to the fact that plaintiff damaged the subject apartment, defendants failed to establish the cost to repair the damages which did not result from ordinary wear and tear.”); Nee v Gottlieb, 1 Misc 3d 132(A), 2003 NY Slip Op 51617(U) (App Term, 2d & 11th Jud Dists 2003).

§ 7:25.50. Landlord entitled to offsets against security deposits--Security deposit can serve as offset only to extent of damages--Accord and satisfaction

When accepting the return of a security deposit, the cashing of the check may acknowledge that the debt has been paid in full or that the acceptance is in full settlement of a disputed amount, thereby triggering an accord and satisfaction.[FN1]

[FN1] Guadagni v Chong, 2 Misc 3d 126(A), 2003 NY Slip Op 51678(U) (App Term, 9th & 10th Jud Dists 2003) (“By cashing a check. . . tendered by the defendants as a ‘final settlement,’ plaintiffs were barred from bringing the instant action to recover the balance of their security deposit.”); see § 14:336.

§ 7:26. Landlord entitled to offsets against security deposits--Tenant may not offset rent arrears against security deposit

A tenant may not request that security proceeds be applied to offset the nonpayment of rent.[FN1]

[FN1] See Koenig v Ex Urban Realty, NYLJ, 3/12/87, at 12, col 2 (Sup Ct, Nassau County); see also Paramount Group, Inc. v Guardian 30th St. Corp., NYLJ, 1/15/92, at 23, col 2 (Civ Ct, NY County) (Since leases are bilateral obligations, the obligation to pay rent is separate from the obligation to make a security deposit.); cf. § 7:54.

§ 7:27. Landlord entitled to offsets against security deposits--Tenant may not offset rent arrears against security deposit--Interest owed on security monies no defense to rent nonpayment

Since a tenant’s counterclaim seeking interest on a security deposit is not “inextricably intertwined” with a landlord’s nonpayment case, such claim usually will be severed or dismissed.[FN1]

[FN1] Amdar v Hahalis, NYLJ, 3/1/90, at 23, col 2 (App Term, 1st Dept); 873 Broadway Assoc. v Smokler, NYLJ, 6/13/90, at 23, col 3 (Civ Ct, NY County) (Petitioner’s motion to sever respondent’s counterclaim seeking interest on a security deposit was granted because it was not “inextricably related to petitioner’s cause of action for rent.”).

§ 7:28. Landlord entitled to offsets against security deposits--Tenant may not offset rent arrears against security deposit--Accrued interest on security deposit need not be applied to supplemental security owed by tenant

When a lease requires a supplemental payment or deposit of security, a landlord is not required to credit accrued interest to the increase. The differential must still be remitted by the tenant.[FN1]

[FN1] McKee v Wellington Estates, Ltd., 94 AD2d 686 (1st Dept 1983), affd 60 NY2d 853 (1983) (“There is no obligation on the landlord under [GOL § 7-103 (2)] to apply accrued interest on the tenant’s security deposit toward an increase in the security deposit when new leases are entered into at higher rents.”); see also § 7:54.

§ 7:29. Landlord entitled to offsets against security deposits--Tenant may not offset rent arrears against security deposit--An exception exists when lease and statutory requirements are violated

A landlord’s noncompliance with applicable lease and statutory requisites pertaining to the security proceeds may result in a “setoff” against any money judgment ultimately secured against the tenant.[FN1]

[FN1] Love Lori, Inc. v Love 85th Street Pharmacy, Inc., NYLJ, 3/20/98, at 25, col 3 (App Term, 1st Dept) (Petitioner’s commingling of the funds and failure to notify tenant of the name of the banking organization where the deposit was held entitled the tenant to the recovery of its security by way of a “setoff against petitioner’s judgment for rent”.).

§ 7:30. “Prepaid rent” must also be held in trust

The General Obligation Law’s ambit extends to prepaid rent,[FN1] and provides that:
Whenever money shall be deposited or advanced on a contract or license agreement for the use or rental of real property as security for performance of the contract or agreement or to be applied to payments upon such contract or the contract or agreement when due, such money, with interest accruing thereon, if any, until repaid or so applied, shall continue to be the money of the person making such deposit or advance and shall be held in trust by the person with whom such deposit or advance shall be made and shall not be mingled with the personal moneys or become an asset of the person receiving the same, but may be disposed of as provided in section 7-105 of this chapter.[FN2]

[FN1] See e.g., In re Pal-Playwell, Inc., 334 F2d 389 (2d Cir 1964); Yasuda Trust and Banking Co. v Carven Assoc., NYLJ, 6/28/95, at 29, col 3 (Sup Ct, NY County); Purfield v Kathrane, 73 Misc 2d 194 (City Civ Ct 1973).

[FN2] (GOL 7-103 (1) (emphasis supplied).

§ 7:31. “Prepaid rent” must also be held in trust--Example: prepaid rent must be transferred to receiver

In a foreclosure case, the receiver sought an order directing the defendant-landlord to relinquish $52,000 in prepaid rent. While noting an absence of legislative history on the subject, the court held that the language of the General Obligations Law required that prepaid rent be held in trust, so as “to protect tenants from a landlord’s misappropriation of these funds[.]”[FN1] As a result, the court concluded that the receiver had standing and was entitled to the funds.

[FN1] Yasuda Trust and Banking Co. v Carven Assoc., NYLJ, 6/28/95, at 29, col 3 (Sup Ct, NY County). See GOL §§ 7-103, 7-105.

II. Additional Rules for Residential Security Deposits

§ 7:32. Generally

General Obligations Law Article 7 requires that most residential security deposits be held in interest-bearing accounts and further prescribes the type of banking institution which may be utilized, the governing notice requirements, and the disposition of any earned interest.[FN1] Additional rules apply to units governed by rent-control and rent-stabilization.[FN2]

[FN1] See § 7:33.

[FN2] See §§ 7:45 to 7:62.

§ 7:33. Security deposit must be held in an interest-bearing account in a New York state bank

Any security deposit provided “for the rental of property containing six or more family dwelling units” must be held in trust by the landlord in a segregated interest-bearing account throughout the term of the tenant’s occupancy of the demised premises.[FN1] The security account must be held by a banking institution having a place of business within the State of New York and must earn interest at the prevailing rate earned by other such deposits made with local banks.[FN2]

[FN1] GOL 7-103 (2-a).

[FN2] GOL 7-103 (2-a).

§ 7:34. Security deposit must be held in an interest-bearing account in a New York state bank--Exception: fewer than six dwelling units

The provisions of GOL 7-103 requiring the landlord to deposit all security deposits in a banking institution do not apply to rental properties containing fewer than six dwelling units.[FN1]

Caveat:

Properties containing fewer than six dwelling units may include rent-regulated apartments. While the General Obligations Law does not require landlords of such small buildings to hold tenants’ security deposits in interest-bearing bank accounts, regulations governing rent-controlled and rent-stabilized tenancies impose this requirement.[FN2]

[FN1] See GOL 7-103 (2-a); see also Finnerty v Freeman, 176 Misc 2d 220 (App Term 1998) (Since the statute was inapplicable to the property in question, landlord’s placement of security proceeds “in a sealed envelope that remained in the private possession of the person receiving said funds ... constitute[d] sufficient compliance with the statutory mandate to hold a tenant’s security ‘in trust’.”); Williams v Brand, NYLJ, 5/3/96, at 32, col 3 (App Term, 2d Dept) (award of interest to tenant on security deposit stricken when building contained fewer than six apartments and there was no proof that landlord held security funds in account or otherwise agreed to do so); Price v Doney, NYLJ, 6/7/95, at 29, col 1 (App Term, 9th & 10th Jud Dists) (“There being no express provision in the subject lease requiring the deposit of defendants’ security in an interest-bearing account, nor any agreement to pay interest on the deposit, [landlord] is not required to pay interest on the security.”).

[FN2] See §§ 7:47 and 7:56.

§ 7:35. Security deposit must be held in an interest-bearing account in a New York state bank--Written notice to tenant required

The landlord must notify the tenant or other party making the security deposit, in writing, of the name and address of the banking organization holding the proceeds and must confirm the amount of the deposit.[FN1] A landlord’s endorsement of checks with the phrase “for deposit only,” along with the “stamped name of the bank”, does not qualify as sufficient notice under this statute.[FN2]

[FN1] GOL 7-103 (2).

[FN2] LeRoy v Sayers, 217 AD2d 63 (1st Dept 1995); Love Lori, Inc. v Love 85th Street Pharmacy, Inc., NYLJ, 3/20/98, at 25, col 3 (App Term, 1st Dept) (Petitioner’s commingling of the funds and failure to notify tenant of the name of the banking organization where the deposit was held entitled the tenant to the recovery of its security by way of a “setoff against petitioner’s judgment for rent.”).

§ 7:36. Security deposit must be held in an interest-bearing account in a New York state bank--Written notice to tenant required--Effect of violation of notice provisions

Violation of the statute’s notice provision, at least as it pertains to the identity of the banking institution, has been held to be inconsequential and did not entitle the tenant to the return of the proceeds.[FN1]

[FN1] Shandwick USA, Inc. v Exenet Technologies, Inc., 192 Misc 2d 280 (City Civ Ct 2002); Purfield v Kathrane, 73 Misc 2d 194 (City Civ Ct 1973); but see Love Lori, Inc. v Love 85th Street Pharmacy, Inc., NYLJ, 3/20/98, at 25, col 3 (App Term, 1st Dept) (Landlord’s failure to notify, coupled with landlord’s commingling of funds, entitled tenant to recovery of the security deposit by way of a “set-off against [landlord]’s judgment for rent.”).

§ 7:37. Security deposit must be held in an interest-bearing account in a New York state bank--Landlord entitled to administrative fee

The landlord or party depositing security funds is entitled to receive annually, as an administrative fee or expense, an amount equal to one percent of the interest accrued upon the amount deposited. The landlord is not entitled to any other compensation or fee for administrative or custodial services. [FN1] A landlord generally is not required to apply accrued interest to any subsequently required increase in the security deposit. This differential must still be paid by the tenant.[FN2]

[FN1] GOL 7-103 (2); see §§ 7:47 and 7:55.

[FN2] See § 7:28.

§ 7:38. Security deposit must be held in an interest-bearing account in a New York state bank--Annual interest payments

The interest accruing on the security deposits (less the one percent administrative fee), is to be held in trust by the landlord together with the security proceeds until repaid, applied, or paid to the tenant on an annual basis.[FN1]

Practice Pointer:

The provisions of GOL 7-103 do not clearly specify whether the election regarding payment of the annual interest may be triggered by the tenant. It is arguable, given the statute’s silence, that the election is that of the holder of the proceeds.[FN2]

[FN1] GOL 7-103 (2).

[FN2] Cf. § 7:54.

§ 7:39. Security deposit must be held in an interest-bearing account in a New York state bank--Attorney General has standing to sue

It has been held that the New York State Attorney General has standing to maintain a proceeding on behalf of tenants to compel landlords to deposit security-related monies in interest-bearing accounts.[FN1] The Attorney General may allege a fraudulent practice which would justify an assertion of jurisdiction pursuant to Executive Law § 63 (12).[FN2]

[FN1] GOL 7-107; People by Lefkowitz v Parker, 38 NY2d 743 (1975) (GOL 7-107 “accords the Attorney-General standing to maintain this proceeding regardless of who will benefit thereby and irrespective of when the violation occurs or has occurred.”).

[FN2] See Federal Nat. Mortg. Assn. v Lefkowitz, 383 F Supp 1294 (SD NY 1974) (The New York State Attorney General has standing when a landlord engages in persistent illegal activity under Executive Law § 63 (12).); State v Wolowitz, 96 AD2d 47 (2d Dept 1983) (absent “repeated or persistent fraud or illegality” the Attorney General may not seek “a remedy with respect to some singular act of fraud or illegality, even if existent.”).

§ 7:40. Liability of new landlord for security deposits of non-rent-stabilized tenants: GOL 7-108

In addition to the general statutory protections governing the transfer of security deposits upon the conveyance of the property,[FN1] further liability is imposed upon the “grantee” or “assignee” of residential deposits for those properties consisting of six or more dwelling units.[FN2]

[FN1] GOL 7-105; see also § 7:16.

[FN2] GOL 7-108; see also § 7:48.

§ 7:41. Liability of new landlord for security deposits of non-rent-stabilized tenants: GOL 7-108--Liability not absolute; “actual knowledge” of security deposit required

The grantee or assignee of the premises is liable to the tenant for the return of the proceeds together with accrued interest, regardless of whether the security deposit has been transferred, only to the extent that the new landlord has actual knowledge of such deposit.[FN1]

[FN1] GOL 7-108 (2) (b); GOL 7-107; see also § 7:57.

§ 7:42. Liability of new landlord for security deposits of non-rent-stabilized tenants: GOL 7-108--Liability not absolute; “actual knowledge” of security deposit required -- “Actual knowledge,” defined

The statute provides that a grantee or assignee of the leased premises will be deemed to have actual knowledge of any security deposit:

• which is deposited in a banking institution pursuant to Section 7-103 at any time during the six months immediately preceding the closing or other transfer of title;

• acknowledged in any written lease in effect at the time of closing; and/or
• supported by the tenant’s documentary evidence.[FN1]

[FN1] GOL 7-108 (2) (b).

§ 7:43. Liability of new landlord for security deposits of non-rent-stabilized tenants: GOL 7-108--New landlord must notify tenant when there is no record of security deposit

The statute further requires that, within thirty days following the closing, the party acquiring the property notify tenants for whom there is no record of a security deposit. The written notice must advise the tenant that, unless within thirty days of the notice’s receipt the new owner is provided with documentary proof of a security deposit tendered to a prior owner, the tenant will have no further recourse against the successor. The evidence acceptable under the statute is limited to a cancelled check drawn to or payable to the former owner, a receipt from the former owner, or a written lease signed by the former owner acknowledging the security deposit. If the tenant fails to provide such documentation within the thirty day period, the tenant will be precluded from later asserting a security-related claim.[FN1]

[FN1] GOL 7-108 (2) (c).

§ 7:44. Liability of new landlord for security deposits of non-rent-stabilized tenants: GOL 7-108--New landlord must notify tenant when there is no record of security deposit--Purchaser can demand escrow account from seller

The statute grants the purchaser the right to demand that the transferor establish an escrow account, equal to one month’s rent for any leased property when there is no record of a security deposit, for the purpose of holding the buyer harmless should a tenant subsequently give notice of a security deposit claim.[FN1] In the event a receiver of rents is appointed, the receiver’s liability is limited to the amount of the security deposits actually transferred and to the operating income in excess of expenses generated during the receivership.[FN2]

[FN1] GOL 7-108 (2) (c), (d).

[FN2] GOL 7-108 (2) (e).

§ 7:45. Additional restrictions on security deposits of rent-controlled tenants

Rent-control regulations, both within and outside New York City, reiterate some of the provisions of General Obligations Law Article 7 concerning residential security deposits and add further restrictions as to the maximum amount of security that must be deposited.

§ 7:46. Additional restrictions on security deposits of rent-controlled tenants--Maximum amount of security deposit

For rent-controlled premises, applicable regulations permit a landlord to collect one month’s rent as security. When the rental payment period is for a term of less than one month, the security deposit is limited to one week’s rent.[FN1]

[FN1] (Rent & Eviction Regs.) 9 NYCRR § 2105.5; (N.Y.C. Rent & Eviction Regs.) 9 NYCRR § 2205.5; see Park Holding Co. v Johnson, 106 Misc 2d 834 (City Civ Ct 1980).

§ 7:47. Additional restrictions on security deposits of rent-controlled tenants--Deposit in interest-bearing New York State bank account required; one-percent administrative fee permitted

The security deposit for a rent-controlled tenant must be held in an interest-bearing account with a banking organization having a place of business within New York State.[FN1] Rent-control regulations further provide that the landlord is entitled to receive an annual administration expense equivalent to one percent of the security money on deposit, with the balance to be held in trust until repaid, applied, or annually paid to the tenant.[FN2]

Caveat:

Rent-controlled apartments may be found in residential buildings containing fewer than six dwelling units.[FN3] For these tenants, rent-control regulations require that security deposit monies be held in interest-bearing bank accounts, notwithstanding the General Obligations Law’s exemption of buildings with less than six dwelling units.[FN4]

[FN1] (Rent & Eviction Regs.) 9 NYCRR § 2105.5; (N.Y.C. Rent & Eviction Regs.) 9 NYCRR § 2205.5.

[FN2] (Rent & Eviction Regs.) 9 N.Y.C.R.R. § 2105.5; (N.Y.C. Rent & Eviction Regs) 9 N.Y.C.R.R. § 2205.5; cf. § 7:54

[FN3] See Ch 11.

[FN4] See § 7:33.

§ 7:48. Additional restrictions on security deposits of rent-controlled tenants--Liability of new landlord for security deposits of rent-controlled tenants

In addition to the general statutory provisions concerning transfer of security deposits upon conveyance of real property,[FN1] additional liability is placed upon the “grantee” or “assignee” of deposits for all rent-controlled dwelling units.[FN2]

[FN1] GOL 7-105; see § 7:16.

[FN2] GOL 7-108; see also GOL 7-107; see generally §§ 7:40 to 7:45.

§ 7:49. Additional restrictions on security deposits of rent-controlled tenants--Collection of excess security deposit constitutes rent overcharge

In general, a rent-controlled tenant can maintain a claim or counterclaim for rent overcharge in a court proceeding.[FN1] Such claim may include an allegation that a landlord has demanded or collected a security deposit in excess of the legal maximum.[FN2]

[FN1] See Ch 11.

[FN2] See, e.g., Tockerman v Franklin, 74 NYS2d 604 (Mun Ct 1947) (security deposit exacted by landlord was $350 in excess of the legal security, constituted rent in excess of allowable maximum rent, and was applied to rent arrears owed to landlord).

§ 7:50. Additional restrictions on security deposits of rent-stabilized tenants

Rent-stabilization regulations within and outside New York City reiterate the General Obligations Law’s provisions concerning the deposit of security funds into interest-bearing accounts in New York banks. However, additional restrictions under the General Obligations Law and rent-stabilization regulations:

• limit the amount of security deposit which may be demanded;[FN1]
• give tenants the right to elect whether interest on the security is disbursed; [FN2] and
• enhance an owner’s liability for the funds upon conveyance of the property. [FN3]

[FN1] See § 7:51.

[FN2] See § 7:54.

[FN3] See § 7:57.

§ 7:51. Additional restrictions on security deposits of rent-stabilized tenants--Amount of security deposit generally limited to one month’s rent

Tenants occupying residential housing units subject to rent-stabilization cannot be required to deposit any amount greater than one month’s rental payment, regardless of any lease, contract, or agreement providing for a greater amount.[FN1]

[FN1] (ETPR) 9 NYCRR § 2505.4; (RSC) 9 NYCRR § 2525.4; see also Matter of Slope Realty Co., DHCR Admin. Rev. Dckt. No. CH210157RO (3/13/97) (landlord’s insistence upon a $50 “key deposit” was found to be unauthorized and comprised a rent overcharge); but see Matter of Fraclac Realty Corp., DHCR Admin. Rev. Dckt. No. BH410015RO (10/16/96) (Parties’ agreement, which permitted tenant to modify apartment wall subject to an additional $225 deposit, was found to be reasonable and did not constitute a rent overcharge.); see generally §§ 11:335 et seq.

§ 7:52. Additional restrictions on security deposits of rent-stabilized tenants--Amount of security deposit generally limited to one month’s rent-- Exception: larger deposit on base date

If, prior to the enactment of either the New York City Rent Stabilization Code or the Emergency Tenant Protection Regulations, the tenant entered into occupancy and gave the landlord a security deposit greater than one month’s rent, and the tenant has continuously occupied the same housing unit since that time, such arrangement may continue during the term of the lease and any renewals thereof. Only in such a limited instance may the landlord require the rent-stabilized tenant to maintain security in an amount greater than one month’s rent.[FN1]

[FN1] (ETPR) 9 NYCRR § 2505.4; (RSC) 9 NYCRR § 2525.4.

§ 7:53. Additional restrictions on security deposits of rent-stabilized tenants--Amount of security deposit generally limited to one month’s rent-- Exception: no security deposit upon lease renewal when none collected initially

Under rent-stabilization, a renewal lease generally shall be “on the same terms and conditions as the expired lease.”[FN1] If the tenant’s initial stabilized lease made no provision for payment of a security deposit, a landlord cannot demand a security deposit upon renewal.[FN2]

[FN1] (ETPR) 9 NYCRR § 2502.5 (c) (7); (RSC) 9 NYCRR § 2522.5 (g).

[FN2] 255 Eastern Parkway Assoc. v Lumpkin, NYLJ, 10/26/94, at 32, col 6 (Civ Ct, Kings County) (Since tenant’s refusal to sign renewal lease with security deposit provision was justified, and subsequent termination of tenancy was not, court permitted the landlord-tenant relationship to remain in effect without benefit of a security deposit.).

§ 7:54. Additional restrictions on security deposits of rent-stabilized tenants--Tenant’s options regarding disbursement of interest

Rent-stabilization affords the tenant the option of electing how interest on the security is disbursed. Under both the New York City Rent Stabilization Code and the Emergency Tenant Protection Regulations, the tenant can elect to have the interest, less the administrative expenses of one percent per annum paid annually to the tenant or held in trust by the landlord.[FN1] The New York City Rent Stabilization Code also permits the tenant to elect to have the interest applied to the rent due for the housing unit.[FN2]

[FN1] (ETPR) 9 NYCRR § 2505.4; (RSC) 9 NYCRR § 2525.4.

[FN2] (RSC) 9 NYCRR § 2525.4 (c); cf. § 7:45.

§ 7:55. Additional restrictions on security deposits of rent-stabilized tenants--Administrative fee

The landlord, under both the New York City Rent Stabilization Code and the Emergency Tenant Protection Regulations, is entitled to receive, as an administrative expense, a sum equal to one percent per annum on the security deposit.[FN1]

[FN1] (EPTR) 9 NYCRR § 2505.4 (b); (RSC) 9 NYCRR § 2525.4 (b).

§ 7:56. Additional restrictions on security deposits of rent-stabilized tenants--Deposit in a New York State bank

All security deposits governed by the New York City Rent Stabilization Code and the Emergency Tenant Protection Act must be deposited with a banking organization having a place of business within New York State.[FN1]

[FN1] (EPTR) 9 NYCRR § 2505.4 (a), (d); (RSC) 9 NYCRR § 2525.4 (a), (d).

§ 7:57. Additional restrictions on security deposits of rent-stabilized tenants--Liability for security deposit upon conveyance of property

In addition to the general provisions of GOL 7-105, more stringent rules apply upon the conveyance of residential dwellings covered by the New York City Rent Stabilization Law and the Emergency Tenant Protection Act. Pursuant to GOL 7-107, any grantee or other assignee of the landlord is liable to a rent-stabilized tenant for the security deposit plus any accrued interest, if the previous landlord was liable for such funds. The liability of the successor will not depend upon whether the security proceeds were conveyed by the former owner. Rather, the new owner remains fully and independently liable for return of the proceeds whether or not they were ever transferred by the seller.

Practice Pointer:

Clearly, anyone purchasing residential rental property subject to the New York City Rent Stabilization Law or the Emergency Tenant Protection Act should require a full disclosure by the seller of all deposits held on behalf of tenants. In addition, it is prudent to seek a written indemnification by the seller in the event a tenant should subsequently stake a claim to security proceeds. As added protection, the purchaser’s attorney may also wish to have notices directed to the tenants requesting the verification of the amounts of the security deposits claimed to be held, in advance of closing title to the premises.

§ 7:58. Additional restrictions on security deposits of rent-stabilized tenants--Liability for security deposit upon conveyance of property--Receiver’s liability is limited

In the event a receiver is appointed for the premises, the receiver’s liability is limited to the amount of any security deposit and accrued interest which is actually turned over pursuant to the provisions of GOL 7- 105,[FN1] and to the receiver’s net-operating income in excess of expenses generated during the period of receivership.[FN2]

[FN1] GOL 7-107 (2) (6); see generally State of New York v Thwaites Place Assoc., 155 AD2d 3 (1st Dept 1990).

[FN2] GOL 7-107 (2) (b); see De Santis v White Rose Assoc., 152 Misc 2d 567 (Sup 1991) (receiver entitled to five-percent maximum commission).

§ 7:59. Additional restrictions on security deposits of rent-stabilized tenants--Liability for security deposit upon conveyance of property--Waiver of benefit void

Any agreement by a rent-stabilized tenant to waive or modify the rights conveyed by GOL 7-107 is void.[FN1] This is consistent with the general rule that a tenant cannot waive the benefit of any of the protections afforded under rent-stabilization.[FN2]

[FN1] GOL 7-107 (3).

[FN2] (EPTR) 9 NYCRR § 2500.12; (RSC) 9 NYCRR § 2520.13.

§ 7:60. Additional restrictions on security deposits of rent-stabilized tenants--Liability for security deposit upon conveyance of property--Effective date

The provisions of GOL 7-107 apply to contracts for the sale or transfer of real property containing rent-stabilized units entered into after September 30, 1984.

§ 7:61. Additional restrictions on security deposits of rent-stabilized tenants -- “Rent Stabilization Lease Rider” must state security deposit rules

A “Rent Stabilization Lease Rider,” prescribed by the DHCR, must be attached to every rent-stabilized vacancy and renewal lease of rent-stabilized tenants in New York City.[FN1] Among its many provisions, the rider outlines the rules governing security deposits. The security deposit provision is found at Rider paragraph 2 and states:

2. Security Deposits

The general rule is that an owner may collect a security deposit no greater than one month’s rent. However, if the present tenant moved into the apartment prior to the date the apartment first became rent stabilized, and the owner collected more than one month’s rent, the owner may continue to retain a security deposit of up to two month’s rent for that tenant only. When the rent is increased, the owner may charge an additional amount to bring the security deposit up to the full amount of the increased rent to which the owner is entitled.

Security deposits must be deposited in an interest bearing trust account in a banking organization in New York State. Owners may annually deduct a 1% service fee. At the tenant’s option, the balance of the interest paid by the banking organization must be applied for the rental of the apartment, or held in trust until repaid, or annually paid to the tenant. The owner must also otherwise comply with the provisions of Article 7 of the General Obligations Law (Obligations Relating To Property Received As Security), including notification to the tenants of the name and address of the banking organization holding the security deposit, and the amount of such deposit.

For an example of such a rider, see:

• FORM: Rent Stabilization Lease Rider, Chapter 4, § 4:341.

[FN1] See Ch 4 and Ch 11.

§ 7:62. Additional restrictions on security deposits of rent-stabilized tenants--DHCR can decide excess security deposit claim

A rent-stabilized tenant can file a complaint alleging that a landlord has demanded or collected security deposit in excess of the legal maximum with the New York State Division of Housing and Community Renewal (“DHCR”).[FN1]

[FN1] See generally Ch 11.

§ 7:63. Security deposit protection for manufactured-home park tenants

The Real Property Law provides tenants in manufactured-home parks with security deposit protections comparable to those applied to residential dwelling tenants.[FN1]

[FN1] Real Property Law § 233 (g) (4) (a).

§ 7:64. Provision of security deposit for tenants receiving public assistance

When a tenant is a recipient of public assistance, Social Services Law § 143-c authorizes the Department of Social Services to remit lease-related security payments on the tenant’s behalf.[FN1]

[FN1] Park Holding Co. v Johnson, 106 Misc 2d 834, 835 (City Civ Ct 1980).


III. Compare: “Deposit” Pending Approval of Tenant

§ 7:65. Withdrawal of offer prior to landlord’s acceptance

Whether it be in a commercial or residential context, there are often situations in which a tenant is required to execute a lease and deliver advance rental payments and security deposits to the landlord pending approval of the lease by the landlord. When the landlord has not specifically agreed to the tenancy and is not bound by any written lease agreement, and the tenant withdraws the offer prior to its acceptance by the landlord, the security deposit and all other monies delivered to the landlord must be returned to the tenant.[FN1]

[FN1] Rivertower Assoc. v Chalfen, 153 AD2d 196 (1st Dept 1990) (When a lease is never executed “and the application is no more than an offer to lease subject to acceptance, the landlord must return the security and rent deposit ... Absent a valid lease there cannot be a default in obligation warranting the forfeiture of a deposit.”); see also Villaronga v Birch Brook Manor, Inc., NYLJ, 3/26/97, at 34, col 5 (Justice Ct, Westchester County) (“‘[A]n agreement to agree’ to a future contract lacks the essentials of a binding contract.” Therefore, the deposit of $900 was returned to the tenant.)
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Postby TenantNet » Tue Oct 03, 2006 5:41 pm

CTRC Fact Sheet #006

RENT SECURITY DEPOSITS

A rent security deposit is an amount of money, separate from the rent itself, collected from the tenant and held by the landlord as security against loss due to the misdeed of the tenant. A rent security deposit may be held for the duration of the tenancy, including renewals of the initial lease. At the end of the tenancy, the landlord may claim all or a portion of the rent security deposit to cover unpaid rent or damage to the rented property caused by the tenant beyond "normal" wear and tear. Rent security deposits are authorized and regulated by the New York State General Obligations Law (GOL), which affects all New York State tenants. The GOL also contains special provisions for tenants in apartments subject to the Rent Control and Rent Stabilization Laws.


General Rules

The GOL provides that all rent security deposit moneys, plus accrued interest, if any, be held in trust by the landlord, separate from the landlord's own funds. The term "in trust" means that the moneys collected for a rent security deposit remain the property of the tenant and must be placed in an individual tenant account. In buildings of six or more apartments, the law requires all deposits be held in interest-bearing accounts in a bank within New York State. In smaller buildings, the landlord is not required to hold deposit moneys in an interest-bearing account, but if he does, the interest earned becomes the property of the tenant. When a security deposit bank account is opened (or changed), the landlord must notify each affected tenant of the name and address of the banking institution, and the amount currently held. Some landlords include a clause in the lease that the rent security deposit will be applied to the last month's rent. This is legal, but does not relieve the landlord of the obligation to put the deposit in a separate bank account, interest-bearing, if appropriate. A landlord may not commingle (mix) security deposit moneys with his own; if he does, a tenant has the right to ask a court to rule that, as such, the landlord has converted the trust moneys to personal use and that he, the landlord, should lose the right to retain a security deposit.


Amount of Deposit

Landlords of unregulated units can demand any amount of deposit. In contrast, in New York City, and in the counties of Westchester, Nassau and Rockland and other areas in New York State subject to the Rent Control or Rent Stabilization Laws, the landlord of the regulated unit can hold a security deposit not greater than one month's current legal rent. The only exception to this rule affects the few tenants who made a deposit greater than one month's rent prior to the date their apartment became subject to rent stabilization and who have been in continuous occupancy since then; that greater deposit may continue to be held, but not increased. A landlord who violates the one-month's rent limitation is overcharging the regulated tenant, who should file a complaint of overcharge with the New York State Division of Housing and Community Renewal on its Form RA-89. The tenant should claim an award of triple damages (three times the amount of overcharge). (See our factsheet, Overcharges Under NYC Rent Stabilization.)


When can a Security Deposit be Demanded?

Typically, a rent security deposit will be authorized by a clause in the first, or vacancy, lease, and paid at the time the tenant signs the lease or takes occupancy. The landlord may omit a provision to hold a rent security deposit, or agree to hold an amount less that a full month's rent. For unregulated tenants, a security deposit lease clause could be added to a renewal of a lease. For rent stabilized tenants, however, the NYC Rent Stabilization Code prohibits the addition of such a clause if the tenant's first lease did not contain a clause authorizing a security deposit. Landlords sometimes collect a rent security deposit without giving a lease. Since the tenant would then have no documentation of the deposit, the tenant should take care to get a receipt clearly showing that a deposit was given. Even without a lease, the rent security deposit provisions of the GOL apply.


When can a Security Deposit be Increased?

A lease renewal usually extends the landlord's right to a security deposit contained in the first lease, and may provide for an increase in the rent security deposit to the level of the new monthly rent. For regulated units, where the landlord is limited to a security deposit of no more than one month's rent, in calculating the new rent security deposit requested, accrued interest if not distributed to the tenant, should be credited.


Interest Payments

Interest earned on the tenants account must be at the prevailing rate for similar types of accounts in the bank's geographic area. All interest earned becomes the property of the tenant, except for one percent which the landlord may retain to compensate for the cost of administrating the account. At the tenant's choice, the remainder of the interest may be (1) annually paid to the tenant, (2) applied to rent, or (3) allowed to accrue in the account.


Failure to Hold in Separate Account

If there is evidence that the landlord has not deposited the rent security deposit in a separate, interest-bearing bank account, the tenant has the right to demand its return. Failure to receive annual tax forms notifying the tenant of interest earned on the account or the landlord's refusal to respond to requests regarding disposition of the earned interest, might be such evidence. First, there should be a written request to the landlord asking him for information on the current status of the rent security deposit moneys and the name and address of the banking institution where the account is held. If there are grounds to believe that the moneys are not properly deposited, state those grounds for the record and demand that the deposit be held according to law or returned to you. Request the landlord reply in writing within ten business days. If he does not, you can file a complaint with the Attorney General (see below). For regulated tenants, a complaint of overcharge (as above) should also be filed with DHCR, stating that the landlord, by mixing the deposit with his own funds, has collected an overcharge.


Protection Against Future Claims

When tenants move out, landlords often make claims against rent security deposits and refuse to return them. They may allege that the tenant damaged their property beyond normal wear and tear. Certain steps can and should be taken to avoid losing all or some of a deposit when vacating an apartment.

Upon moving in, tenants should inspect the apartment with the landlord. Existing problems should be identified and either listed in the lease, or in a separate letter from him. If the landlord refuses to perform the inspection, the tenant with a friend, who can be a witness later, should do so. Documentation, including photographs, should be sent by certified mail to the landlord. These steps are best taken after the lease has been executed so that the landlord cannot retaliate and withdraw his lease offer.

Upon vacating, the tenant should leave the apartment in "broom- clean" condition, meaning no trash or discarded possessions left in the apartment. The tenant should also make whatever minor and trivial repairs he can (spackling holes in the plaster made by picture hook nails, etc.) in order to deny the landlord any excuse for deducting his invariably exaggerated costs for making those repairs from the security deposit.


Return of Deposit

The tenant should notify the landlord, at the time specified in the lease and in writing, of plans not to renew the lease. A vacate date should be given. At the same time, the tenant should also include a demand for the return of the security deposit and remind the landlord of apartment conditions that pre-dated the occupancy if they still exist.

If the tenant fails to notify the landlord of intention to vacate, especially if the vacate date does not correspond with the lease termination date, it will be easier for the Landlord to refuse to return the rent security deposit. At any rate, landlords will almost never return a rent security deposit until after the tenant has vacated.

Many landlords will simply ignore a tenant's demand to return a deposit. They know that the burden to act will fall on the tenant, and that the tenant, either not knowing his rights, or out of fear, or apathy, often will do nothing further. Experienced tenants anticipate that the landlord will not return a deposit and counter by not paying the last month's rent. This practice is not authorized by the lease or the law, but does serve to circumvent the loss of the deposit by placing the burden on the landlord to sue to collect the last month's unpaid rent from a tenant no longer in occupancy.

Taking this route has a potential disadvantage. The tenant cannot safely use that landlord as a credit reference when trying to rent another apartment. However, assuming that payment of the last month's rent is made, there are a number of strategies for forcing the return of a rent security deposit.


Small Claims Court

Small Claims Court, a division of the Civil Court in New York City, has jurisdiction over disputes and claims involving amounts up to $2,000. Such claims include unreturned rent security deposits. The court's process is simple, a lawyer is not required and cases are heard in the evening. Filing a Small Claims summons costs about five dollars, and notice of the summons is sent by the court to the landlord, telling him of the claim and the date of the hearing.

Compared to all other strategies, Small Claims Court may be the most effective. Just receiving a summons may induce the landlord to return all or a portion of the deposit. If not, there will be an appearance before a judge or arbitrator, (landlord's choice; an arbitrator speeds the process, but the right of appeal is waived). If the landlord runs the building as a corporation, he must appear represented by an attorney. This can be expensive and may motivate him to return the security deposit.

A major problem with the Small Claims approach is the difficulty of collecting the amount of a judgment. If the tenant wins, the landlord may refuse to pay and force the tenant to employ the services of a Sheriff or Marshal to attach the landlord's assets. Tenants are advised that an earlier settlement worked out with the landlord, might be a better resolution than winning and then trying to collect the court-awarded judgement. A booklet called A Guide to Small Claims Court is available free from the various offices of this court around the city.


Attorney General

The New York State Department of Law, headed by the Attorney General (AG), accepts tenant complaints involving security deposits. After a tenant files a complaint on their form (available by calling 212-416-8000), the AG will contact the landlord, providing him with the opportunity to reply. The Attorney General's approach is to mediate a resolution by informing the landlord of the obligations of the law and the AG's authority to enforce the law. A landlord who has no damage claim against a former tenant, and who is merely trying to keep the deposit, will often respond to this pressure. For tenants in occupancy, the AG will accept complaints of failure to segregate rent security money in a separate, and if required, interest- bearing bank account.


Comments

The laws affecting security deposits in New York State are not protective enough. It is far too simple for landlords to abuse them without penalty. Many landlords, once they collect a security deposit, treat it as their own money, never to be returned to the tenant unless they are forced to do so. The "statutory trust" character of security deposits is thus flouted.

Reforms that would put some "teeth" into the law, such as triple damages for unwarranted withholding of deposits, are needed. Until reforms are enacted, the burden will continue to be on tenants to demand that there be strict compliance with the existing law.
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NYS General Obligations Law - Article 7

Postby TenantNet » Mon Jul 14, 2008 7:15 pm

Article 7 Title 1

7-101. Money deposited or advanced for use or rental of personal property; waiver void. 1. Whenever money shall be deposited or advanced on a contract for the use or rental of personal property as security for performance of the contract or to be applied to payments upon such contract when due, such money, with interest accruing thereon, if any, until repaid or so applied, shall continue to be the money of the person making such deposit or advance and shall be a trust fund in the possession of the person with whom such deposit or advance shall be made and shall be deposited in a bank or trust company and shall not be mingled with other funds or become an asset of such trustee, excepting, however, that such trust funds may be deposited with other funds that have been deposited or advanced to the trustee as security for performance of a contract for the use or rental of personal property or be applied to payments upon such contract when due. If the money being deposited or advanced is for the use or rental of personal property and the money deposited or advanced is seven hundred fifty dollars or more and is for the use or rental of personal property for a period equal to or greater than one hundred twenty days, the person receiving such money shall deposit it pursuant to the provisions of subdivision one-a of this section.

1-a. Whenever the money so deposited or advanced is seven hundred fifty dollars or more and is for the use or rental of personal property for a period equal to or greater than one hundred twenty days, the person receiving such money shall, subject to the provisions of this section, deposit it in an interest bearing account in a banking organization within the state which account shall earn interest at a rate which shall be the prevailing rate earned by other such deposits made with banking organizations in such area. Such person shall not be required to keep the funds of the separate persons from whom security deposits or advances have been received in separate depository accounts, provided his books of account shall clearly show the allocation of the funds deposited in his general or special depository account. The person depositing such security money shall be entitled to receive, as administration expenses, a sum equivalent to one per cent per annum upon the security money so deposited, which shall be deducted from the interest earned on such security money from the banking organization and shall be in lieu of all other administrative and custodial expenses relating to the security deposit or advance. The balance of the interest paid by the banking organization shall be the money of the lessee making the deposit or advance and shall either be held in trust by the person with whom such deposit or advance shall be made, until repaid or applied for the use or rental of the personal property, or annually paid to the lessee making the deposit of security money.

1-b. This section shall not be applicable to any advance payment of money under or with respect to any contract for the use or rental of personal property that, in accordance with the terms applicable to such payment, either (a) is not revocable by the person making such payment and is not otherwise subject to being returned or refunded to such person, or (b) otherwise satisfies or discharges an equivalent liability under such contract when such payment is made, whether or not such liability is otherwise then due and payable under the terms of such contract.

1-c. This section shall apply to money deposited or advanced on contracts for the use or rental of personal property as security for performance of the contract or to be applied to payments upon such contract when due, only if (a) such contract is governed by the laws of this state as the result of a choice of law provision in such contract, in accordance with section 1-105 of the uniform commercial code (subject to the limitations on choice of law by the parties to a consumer lease under section 2-A-106 of the uniform commercial code), or such contract is otherwise governed by the laws of this state in accordance with applicable conflict of laws rules, and (b) the lessee under such contract is located within this state, within the meaning of the uniform commercial code (with respect to the location of debtors), except that a foreign air carrier under the Federal Aviation Act of 1958, as amended, shall not be deemed located in this state solely as a result of having a designated office of an agent upon whom service of process may be made located in this state.

2. Any provision of a contract whereby a person who has deposited or advanced money on a contract for the use or rental of personal property as security for the performance of the contract waives any provision of this section is absolutely void.

3. This section shall not be applicable to any deposit or advance of money made in connection with the borrowing of securities for any lawful purpose.


7-103. Money deposited or advanced for use or rental of real property; waiver void; administration expenses. 1. Whenever money shall be deposited or advanced on a contract or license agreement for the use or rental of real property as security for performance of the contract or agreement or to be applied to payments upon such contract or agreement when due, such money, with interest accruing thereon, if any, until repaid or so applied, shall continue to be the money of the person making such deposit or advance and shall be held in trust by the person with whom such deposit or advance shall be made and shall not be mingled with the personal moneys or become an asset of the person receiving the same, but may be disposed of as provided in section 7-105 of this chapter.

2. Whenever the person receiving money so deposited or advanced shall deposit such money in a banking organization, such person shall thereupon notify in writing each of the persons making such security deposit or advance, giving the name and address of the banking organization in which the deposit of security money is made, and the amount of such deposit. Deposits in a banking organization pursuant to the provisions of this subdivision shall be made in a banking organization having a place of business within the state. If the person depositing such security money in a banking organization shall deposit same in an interest bearing account, he shall be entitled to receive, as administration expenses, a sum equivalent to one per cent per annum upon the security money so deposited, which shall be in lieu of all other administrative and custodial expenses. The balance of the interest paid by the banking organization shall be the money of the person making the deposit or advance and shall either be held in trust by the person with whom such deposit or advance shall be made, until repaid or applied for the use or rental of the leased premises, or annually paid to the person making the deposit of security money.

2-a. Whenever the money so deposited or advanced is for the rental of property containing six or more family dwelling units, the person receiving such money shall, subject to the provisions of this section, deposit it in an interest bearing account in a banking organization within the state which account shall earn interest at a rate which shall be the prevailing rate earned by other such deposits made with banking organizations in such area.

2-b. In the event that a lease terminates other than at the time that a banking organization in such area regularly pays interest, the person depositing such security money shall pay over to his tenant such interest as he is able to collect at the date of such lease termination.

3. Any provision of such a contract or agreement whereby a person who so deposits or advances money waives any provision of this section is absolutely void.

4. The term "real property" as used in this section is co-extensive in meaning with lands, tenements and hereditaments.


7-105. Landlord failing to turn over deposits made by tenants or licensees and to notify tenants or licensees thereof in certain cases. 1. Any person, firm or corporation and the employers, officers or agents thereof, whether the owner or lessee of the property leased, who or which has or hereafter shall have received from a tenant or licensee a sum of money or any other thing of value as a deposit or advance of rental as security for the full performance by such tenant or licensee of the terms of his lease or license agreement, or who or which has or shall have received the same from a former owner or lessee, shall, upon conveying such property or assigning his or its lease to another, or upon the judicial appointment and qualifying of a receiver in an action to foreclose a mortgage or other lien of record affecting the property leased, or upon the conveyance of such property to another person, firm or corporation by a referee in an action to foreclose a mortgage or other lien of record affecting the property leased if a receiver shall not have been appointed and qualified in such action, at the time of the delivery of the deed or instrument or assignment or within five days thereafter, or within five days after the receiver shall have qualified, deal with the security deposit as follows:

Turn over to his or its grantee or assignee, or to the receiver in the foreclosure action, or to the purchaser at the foreclosure sale if a receiver shall not have been appointed and qualified the sum so deposited, and notify the tenant or licensee by registered or certified mail of such turning over and the name and address of such grantee, assignee, purchaser or receiver.

2. Any owner or lessee turning over to his or its grantee, assignee, to a purchaser of the leased premises at a foreclosure sale, or to the receiver in the foreclosure action the amount of such security deposit is hereby relieved of and from liability to the tenant or licensee for the repayment thereof; and the transferee of such security deposit is hereby made responsible for the return thereof to the tenant or licensee, unless he or it shall thereafter and before the expiration of the term of the tenant's lease or licensee's agreement, transfer such security deposit to another, pursuant to subdivision one hereof and give the requisite notice in connection therewith as provided thereby. A receiver shall hold the security subject to such disposition thereof as shall be provided in an order of the court to be made and entered in the foreclosure action. The provisions of this section shall not apply if the agreement between the landlord and tenant or licensee is inconsistent herewith.

3. Any failure to comply with this section is a misdemeanor.


7-106. Money deposited or advanced for certain installations; waiver void. 1. Whenever any non-public moneys shall be deposited or advanced by the owner of an occupied residential dwelling on a contract for the installation of a private connection to a public sewer line as security for payments or to be applied to payments upon such contract when due, such money, with interest accruing thereon, if any, until repaid or so applied, shall continue to be the money of the person making such deposit or advance and shall be a trust fund in the possession of the person with whom such deposit or advance shall be made and shall be deposited in a bank, trust company, savings bank, savings and loan association, federal savings and loan association or federal mutual savings bank and shall not be mingled with other funds or become an asset of such trustee.

2. Any provision of a contract whereby a person who has deposited or advanced money on a contract for the installation of a private connection to a public sewer line as security for payments or to be applied to payments upon such contract when due waives any provision of this section is absolutely void.


7-107. Liability of a grantee or assignee for deposits made by tenants upon conveyance of rent stabilized dwelling units. 1. This section shall apply only to dwelling units subject to the New York city rent stabilization law of nineteen hundred sixty-nine or the emergency tenant protection act of nineteen seventy-four.

2. (a) Any grantee or assignee of any dwelling unit referred to in subdivision one of this section shall be liable to a tenant for any sum of money or any other thing of value deposited as security for the full performance by such tenant of the terms of his lease, plus any accrued interest, if his or its predecessor in interest was liable for such funds. Such liability shall attach whether or not the successor in interest has, upon the conveyance of such dwelling unit, received the sum as deposited.

(b) The liability of a receiver for payment of any security deposit plus accrued interest pursuant to this subdivision shall be limited to the amount of such deposit actually turned over to him or it pursuant to subdivision one of section 7-105 of this chapter and to the operating income in excess of expenses generated during his or its period of receivership.

3. Any agreement by a lessee or tenant of a dwelling unit waiving or modifying his rights as set forth in this section shall be void.


7-108. Liability of a grantee or assignee for deposits made by tenants upon conveyance of non-rent stabilized dwelling units. 1. This section shall apply to all dwelling units with written leases in residential premises containing six or more dwelling units and to all dwelling units subject to the city rent and rehabilitation law or the emergency housing rent control law, unless such dwelling unit is specifically referred to in section 7-107 of this chapter.

2. (a) In circumstances where any sum of money or any other thing of value deposited as security for the full performance by a tenant of the terms of his lease is not turned over to a successor in interest pursuant to section 7-105 of this chapter, the grantee or assignee of the leased premises shall also be liable to such tenant, upon conveyance of such leased premises, for the repayment of any such security deposit, plus accrued interest, as to which such grantee or assignee has actual knowledge.

(b) For purposes of this section, a grantee or assignee of the leased premises shall be deemed to have actual knowledge of any security deposit which is (i) deposited at any time during the six months immediately prior to closing or other transfer of title in any banking organization pursuant to subdivision two-a of section 7-103 of this chapter, or (ii) acknowledged in any lease in effect at the time of closing or other transfer of title, or (iii) supported by documentary evidence provided by the tenant or lessee as set forth in paragraph (c) of this subdivision.

(c) With respect to any leased premises for which there is no record of security deposit pursuant to subparagraph (i) or (ii) of paragraph (b) of this subdivision, the grantee or assignee of the leased premises shall be obligated to notify the tenant thereof in writing no later than thirty days following the closing or other transfer of title to the fact that there is no record of a security deposit for said leased premises and that unless the tenant within thirty days after receiving notice provides him or it with documentary evidence of deposit, the tenant shall have no further recourse against him or it for said security deposit. For purposes of this subdivision, "documentary evidence" shall be limited to any cancelled check drawn to the order of, a receipt from, or a lease signed by any predecessor in interest, if such predecessor's interest in the leased premises existed on or after the effective date of this section. Except as otherwise provided by subparagraphs (i) and (ii) of paragraph (b) of this subdivision the grantee or assignee of the leased premises shall not be charged with actual knowledge of the security deposit where the tenant fails within the thirty-day period to provide said documentary evidence. Where the grantee or assignee of the leased premises fails to notify the tenant as specified in this paragraph within thirty days following the closing or other transfer of title, the tenant shall be entitled to produce documentary evidence at any time.

(d) The grantee or assignee of the leased premises shall have the right to demand that the grantor or assignor thereof establish an escrow account equal to one month's rent for any leased premises for which there is no record of a security deposit pursuant to paragraph (b) of this subdivision to be used for the purpose of holding harmless the grantee or assignee in any case where, at a date subsequent to the closing or other transfer of title, the tenant gives notice pursuant to paragraph (c) of this subdivision.

(e) The liability of a receiver for payment of any security deposit plus accrued interest pursuant to this subdivision shall be limited to the amount of such deposit actually turned over to him or it pursuant to subdivision one of section 7-105 of this chapter and to the operating income in excess of expenses generated during his or its period of receivership.

3. Any agreement by a lessee or tenant of a dwelling waiving or modifying his rights as set forth in this section shall be absolutely void.


7-109. Commencement of a proceeding or action by the attorney general to compel compliance. If it appears to the attorney general that any person, association, or corporation has violated or is violating any of the provisions of title one of this article, an action or proceeding may be instituted by the attorney general in the name of the people of the state of New York to compel compliance with such provisions and enjoin any violation or threatened violation thereof.
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