By Kimberly Rau, MassLandlords, Inc.
Massachusetts law entitles landlords to collect the following fees at lease signing, and no more: a security deposit equal to one month’s rent, the first month’s rent, the last month’s rent and the cost of re-keying the rental. But you are under no obligation to collect these fees if you don’t want to. If you do decide to collect the last month’s rent when a new tenancy begins, there are some rules you must follow.
In this article, we’ll review some commonly asked questions about the last month’s rent. Read on to determine whether collecting this fee is right for you.
Is the Security Deposit the Same as Last Month’s Rent?
First and foremost, the security deposit you may collect from your tenants is not the same thing as last month’s rent.
The security deposit belongs to the tenant and must be returned to them when the tenancy is over, unless damage outside normal wear and tear has been found. The laws surrounding withholding money from the security deposit are just as rigid as the laws governing how the security deposit is handled during the tenancy.
The last month’s rent, on the other hand, is a prepayment of the final month of tenancy. It belongs to you, the landlord, just as it would belong to you if you waited until the final month to collect the money. You do not have to issue a conditions statement when you accept it, or return it at the end of the tenancy. You do, however, have to issue your tenants a receipt, and an annual interest statement, if applicable.
If I Raise the Rent, Can I Collect Additional Money as Last Month’s Rent?
Taking last month’s rent at the start of a tenancy is not a deposit. MGL Ch. 186, Section 15b, states that a landlord may collect last month’s rent. This same section also discusses security deposits. A security deposit is just that, a deposit. The last month’s rent is not. It is a collection of “rent for the last full month of occupancy calculated at the same rate as the first month.”
What this means is that if you later raise the rent without starting a new lease, you may not collect more money for the last month’s rent. This is because the last month’s rent must be equal to the first month’s rent under the law. If you go the “lazy raise the rent” route, you cannot bill the tenant for the difference between what they already paid and what the new rent is.
If you wish to collect more money against the last month of rent, you should create a new tenancy agreement. Return the last month’s rent you’ve already collected, or use it to credit the renter for the last month of the tenancy under the original rent. Then you can collect a new payment equal to the new monthly rent.
This inability to simply collect the difference between old rent and new rent is one reason some landlords do not take last month’s rent at signing. It’s one less step to follow if you renew a lease and raise the rent. Check with your attorney if you have questions about returning the last month’s rent and collecting a new payment.
Must I Put the Last Month’s Rent Into an Interest Bearing Account, or Can I Spend It?
The law surrounding security deposits makes clear that a security deposit must be placed in an interest-bearing account that is “beyond the claim of creditors of the lessor.” In practice, this means that the account is either in the renter’s name or in the name of a third-party escrow agent (that is, not in the lessor’s name). But the directives for last month’s rent payments are a bit murkier, in part thanks to court decisions.
The official word from mass.gov is that tenants are entitled to interest from the last month’s rent. Much like security deposits, last month’s rent payments are subject to 5% interest if not stored in a bank, or at whatever interest rate the bank offers.
But in the court case Gallo v. Marinelli, the appeals court determined that tenants are not entitled to interest from a last month’s rent payment unless the payment is stored in the bank.
Quoting an earlier court case, Neihaus v. Maxwell, the appeals court found that “[d]eposits of ‘last months' rents are, with certain limitations, the property of the landlord, not the tenant.’”
“’The landlord is not required to set aside the tenant's last month's rent or to place it in a bank account; however, he is required to pay interest on it at five per cent or any lesser rate paid by the bank, if the money is, in fact deposited,’” the appeals court continued, further quoting from Neihaus.
In other words, unlike the security deposit, which belongs to the tenant, last month’s rent belongs to the landlord.
“There is no such provision mandating the placement of the last month's rent in an interest-bearing bank account. We therefore conclude that only when the lessor places a tenant's last month's rent in an interest-bearing account is the tenant entitled to interest,” the appeals court concluded.
While this doesn’t exactly make sense (why would the tenant be entitled to interest if the last month’s rent belongs to the landlord?), it does indicate that only the security deposit needs to be placed in an interest-bearing bank account. The appeals court determined that interest need only be paid if the last month’s rent is placed in an interest-bearing account.
If the payment of last month’s rent belongs to you, then technically, yes, you can spend it ahead of time. But we don’t recommend you do. In fact, there are reasons why we don’t recommend that everyone should take last month’s rent. Instead, we suggest you play to your strengths as a landlord when deciding what money to collect at the start of a tenancy.
Who Shouldn’t Take Last Month’s Rent
It might seem counter-intuitive to advise landlords not to take the last month’s rent at the start of a new tenancy, but there are reasons to avoid it.
If landlord-tenant interactions and business relationships aren’t your strong suits, you probably don't want to collect last month's rent. Why? Last month’s rent requires careful communication about what it is, as well as when it applies.
As we’ve already discussed, you cannot collect more last month’s rent if you raise the rent, unless you take steps to end the current tenancy and start a new one under a new agreement. If you don’t want to do this, collecting the last month’s rent in advance is essentially giving a discount on the final month of tenancy. Remember, you already sold the last month’s rent at the price of the first month. This is a full rent payment, not a deposit on the last month’s rent.
Collecting last month’s rent in advance opens you up to other headaches as well. You have to keep track of that payment. Say your tenant can’t pay rent one month, and you apply the last month’s rent to cover the shortage. Fast forward to the last month of the tenancy, and your renter is claiming they already paid you for that month. If that happens, you will need records of when you took the payment, when it was applied, and for what.
Also, consider a situation in which your tenant informs you they’re moving out. You could apply the last month’s rent to that month, but then they end up not moving out. Then, they don’t pay the next month either. Now you’ve applied the payment to the month they said they were leaving, and have to deal with the fact that they’re late on the current month. Your renters knew they were out of money when they gave notice, but you are only finding out now, a full month later. Waiting to collect rent until the first of each month saves you this problem as well.
When to Take Last Month’s Rent Instead of a Security Deposit
On the other hand, if you are good at landlord-tenant relationships, but not great at bookkeeping, consider taking last month’s rent and skipping the security deposit. Security deposits require meticulous record-keeping and handling, and the consequences for messing up can be very expensive.
If you don’t take a security deposit, or if you do and the deposit is not enough to cover damages, you can always file a small claims lawsuit for damages. This is also true if you initially take a security deposit, but decide to return it to avoid triple damages in the future. No matter what, you are not without recourse.
If You Don’t Take Last Month’s Rent, Consider Taking a Security Deposit
There’s one caveat: you should probably consider taking one or the other as a test that your new renter is able to save and pay lump sums. This is an important part of the tenant screening process.
People who are good at both landlord-tenant relationships and bookkeeping should opt for the security deposit over last month’s rent (you can, of course, always take both).
Taking the last month’s rent in advance may be more trouble than it’s worth, especially when the law as written seems to conflict with case law regarding interest. If you do decide to still collect it, make sure your record keeping is scrupulous, to avoid trouble down the road.