Should You Carry Over or Return a Security Deposit With a Lease Renewal?

By Kimberly Rau, MassLandlords, Inc.

When your tenant moved into their rental unit, you likely took a security deposit from them. Many, if not most, landlords collect this deposit from their renters to ensure they have funds to repair damage beyond normal wear and tear at move-out. Now, a year later, it’s time to renew the lease. Do you need to take a new security deposit, or can you keep the old one in place?

You don’t necessarily have to return and re-issue your tenant’s security deposit when the lease renews, but there are times when you might want to. When in doubt, give it back.

You Can (Usually) Keep the Existing Security Deposit in Place, Even if You Raise the Rent

When you renew a lease, you are signing a new tenancy agreement. Maybe everything is staying exactly the same, or perhaps you’re raising the rent. Either way, you can opt to carry over the existing security deposit. The law states that the security deposit cannot exceed one month’s rent, so it’s okay if the security deposit is less than the new monthly payment.

If you are raising the rent and you want to take a new security deposit to reflect the increase, you must return the old security deposit in full, take a new one, and do a new statement of conditions with your tenant. Make sure you follow all of the laws governing security deposits, just as you presumably did the first time around.

No matter what you choose to do, make sure you provide your tenant with their annual interest statement, and give them a check for the interest accrued on the security deposit. This is required by law.

If You’re Raising the Amount of the Security Deposit, Return the Old One and Collect a New One

Imagine this common scenario. Your tenants sign a lease for $1,500 a month and give you $1,500 for the security deposit. Now, a year later, the rent is going up to $1,650 a month, and you want to keep the security deposit equal to the rent. What should you do?

Many landlords fall into the trap of taking the easy way out. They just ask their tenants for the additional $150 to add to the account with the original security deposit. This may be fine in theory ($1,650 is $1,650, right?). But you should always act as though you’ll have to show your paperwork to a judge one day. If you have a security deposit for $1,650, you need to have a receipt that shows your tenant paid $1,650, not $1,500 one year and $150 the next.

In that situation, you either have just one receipt, for the original $1,500, or you have two receipts, one for $1,500 and one for $150. But MGL Ch. 186 Section 15b prohibits landlords from taking two security deposits, and two receipts on different dates sure looks like two security deposits. Will the judge understand your intent? Maybe. Do you really want to take that risk, when the penalty could be triple damages? Play it safe. Return the old deposit and collect a new one for the correct amount. We’ll explain how to do that in a moment.

You Might Want to Re-do a Security Deposit if You Did It Wrong the First Time

Massachusetts has extremely strict rules regarding security deposits. Among other rules, a security deposit cannot exceed one month’s rent. It must be deposited into an interest-bearing account in the tenant’s name at a Massachusetts-based bank. And annual interest statements and payments must be issued.

Messing up some aspect of the security deposit law can be a costly mistake. In one recent case, a landlord was forced to pay triple damages and $17,000 in attorneys’ fees after a judge ruled they had improperly handled returning a security deposit. Another landlord who withheld his tenant’s security deposit in error nearly ended up in court, before settling with their tenant’s attorney. They “only” have to pay $6,000, and it could have been a lot worse.

Maybe the initial security deposit you took had an unlawful pet deposit added to it. Maybe you didn’t set the account up properly (is it in your tenant’s name?), or you used a bank branch not based in Massachusetts. Any of these issues could land you in court for improper security deposit handling.

Whatever happened in the past, a lease renewal is a good time to return the deposit and set things right. Since you are signing a new lease, you can return the original deposit, along with the annual statement and interest accrued, and start fresh. This is all the paperwork you need, unless you are withholding something from the security deposit. Then, take a new conditions statement and collect a new security deposit, this time making sure you follow all the rules.

Tips for Returning and Taking a New Security Deposit

Security deposits are usually equal or close to (but not more than) one month’s rent. When you return the old security deposit to your tenant, they may not have an extra month’s rent sitting around to write you a new check.

If this is the case, you can have your renter sign the back of the check you wrote to return the deposit to them, endorsing it. Then, under their signature, have them write “Pay To,” followed by your name or your business’ name. Now you can re-deposit the check.

Doing it this way establishes two things. It shows that you returned the initial security deposit, and also proves that your tenant gave you a new one right away. Note that if the new security deposit is not the exact same amount as the old one, you’ll need to take additional steps. If you need to adjust the amount of the deposit, your tenant will need to write you a new check for the difference between the old and new security deposit.

Doing this is different from the aforementioned “lazy practice” of simply asking for the difference between old and new deposit, because you are taking an entirely new deposit. They’ve signed the original check back over to you, and are paying the difference with a new check. It’s fine for a tenant to use multiple forms of tender (cash, two checks, a money order) to pay a single security deposit. Just make sure you write them one receipt, with the date on the top, showing you collected one deposit in full, with separate forms of payment.

What should I do if some of the people on the lease will be leaving?

Anyone who has rented to students knows that sometimes the people who sign the lease initially are not the same people looking to live there at renewal time. Usually, the students who are renewing their rental agreement will want to replace the departing tenants with new roommates. If this is your situation, you are no longer renewing a lease. You’re creating a new rental agreement.

You will need to craft a new lease with the old tenants’ names removed and the new tenants, if any, added. Upon termination of the existing tenancy, perform an inspection and return the old security deposit. This way, the departing roommates can take their portion with them. Then, walk through with the new tenants, issue a new conditions statement and take a new security deposit with the people signing the new lease.

I Realized I Messed Up the Security Deposit, but It’s Not Lease Renewal Time. What Do I Do?

Landlords sometimes ask us if they can just “let sleeping dogs lie” when it comes to security deposit mishaps that are discovered mid-tenancy. If your relationship with your tenants is good, you may be able to make things right going forward without returning and re-issuing the security deposit.

First things first: fix whatever you did wrong. Put the deposit in the correct type of account, or move it to the appropriate bank. Issue a receipt if you didn’t already. Start paying interest. If your tenant questions why they’re just now receiving a receipt or interest statement, you can truthfully say you’re improving your communication and deposit handling processes for your renters’ benefit.

If your relationship with your tenants is not good, or turns sour, you can always follow the most basic rule: when in doubt, give it back.

When In Doubt, Give it Back

In most cases, your lease renewals will be straightforward, with no need to address the security deposit besides giving your tenant the required paperwork and interest.

However, if you are concerned about how you handled the initial security deposit, then returning and reissuing the security deposit is the best course of action. Many attorneys will cite the case of Castenholz v. Caira as evidence that making things right when you realize the error (as long as it’s not more than 30 days past when the tenancy ended) should help you avoid triple damages. In Castenholz, the landlord was found to be in the wrong because they had not returned the security deposit within 30 days of the tenancy ending. The implication there is that returning the deposit in full, with interest, before those 30 days will absolve you of wrongdoing.

In other words, when in doubt, give it back. And always start a new lease and collect a new security deposit if you are changing who is on the rental agreement.

If you have experience with returning and re-issuing security deposits and would like to share your story, please let us know at hello@masslandlords.net .