What Owners Need to Know About NYC Security Deposit Laws

The rules apply to all tenants, not just rent-regulated ones.

A security deposit is money a tenant deposits with the building owner that protects the owner if the tenant stops paying rent, skips out early on the lease, or damages the apartment. In New York, security deposits are governed by New York General Obligations Law §§7-103 to 7-108 and, most recently, the Housing Stability and Tenant Protection Act of 2019 (HSTPA).

Recently, these security deposit rules made the news when the Office of the Attorney General (OAG) announced an agreement with a New York City landlord for failing to return approximately $296,272 in security deposits to New Yorkers. The Attorney General’s office found that the owner didn’t comply with the HSTPA changes to the state’s rental laws when it improperly kept security deposits for 129 tenants.

According to the OAG, the office is engaged in several other investigations related to security deposits and tenant protections. It’s important to be aware that certain HSTPA provisions implemented protections for all tenants and not just regulated ones. Typically, owners of market-rate units enjoy the benefit of making them available on the private market without any regulations as to how much rent can be charged or whether a lease is offered. However, the fact that a tenant isn’t subject to rent regulation doesn’t mean the tenant’s security deposit isn’t regulated.

If you have non-regulated tenants, you need to be aware there are security deposit rules you must follow as a result of the passage of HSTPA in 2019. For example, although security deposits have long been limited to one month’s rent for rent-stabilized tenants, HSTPA amended General Obligations Law §7-108 to extend this limit to unregulated tenants statewide. This effectively eliminates the practice of requiring pre-paid rent, typically known as the “first and last months’ rent.” The law includes “advances” as well as deposits.

In addition to establishing a limit to how much of a security deposit you can collect from non-regulated tenants, the HSTPA imposed other security deposit rules that also apply to non-regulated tenants. We’ll go over the security deposit rules that you must follow.

Return Time Frame, Allowable Deductions

An owner must return the security deposit within 14 days of the tenant moving out. If you take any money out of the security deposit for damages, you must provide an itemized “receipt” describing the damage and its cost. If you don’t provide this receipt within 14 days of the tenant moving out, you must return the entire security deposit, whether there is damage or not.

Owners can use the security deposit only when the lease or tenancy ends or terminates. Also, an owner can use the security deposit to cover only the following:

• Unpaid rent;
• Damage caused by the tenant beyond normal wear and tear;
• Unpaid utility charges provided in the lease; and
• Costs of storing or moving the tenant’s belongings not removed from the unit when the tenant vacated.

However, an owner can’t deduct from the security deposit the cost of repairs or damage found in the initial inspection.

Initial Inspection Requirements

An often overlooked provision of HSTPA is the requirement that owners offer the tenant the opportunity to inspect the apartment to determine its pre-occupancy condition. This initial inspection is performed after the initial lease signing but before occupancy.

If there’s an initial inspection, the parties must execute a written agreement before the tenant moves in. The agreement should state the condition of the unit and details of the existing defects and damages discovered during the initial inspection. The initial inspection agreement may be admissible for evidence related to the security deposit.

Inspection Before the End of Tenancy

Another overlooked HSTPA requirement is notification of the option to have another inspection before a tenant vacates the apartment. The law requires, within a reasonable time after notification of either party’s intention to terminate the tenancy, unless the tenant gives less than two weeks’ notice, the owner notify the tenant in writing of the tenant’s right to request an inspection before vacating the premises and of the tenant’s right to be present at the inspection.

If the tenant requests an inspection, it must take place no earlier than two weeks and no later than one week before the end of the tenancy. And the owner must give the tenant at least 48 hours’ notice of the date and time of the inspection. After the inspection, the owner must give the tenant an itemized statement specifying repairs or cleaning that are proposed to be the basis for any deduction from the deposit. In response, the tenant must be given the right to repair or clean before vacating.

Noncompliance Penalties

If an owner fails to return the security deposit and/or the itemized list of deductions within the time allowed, the owner loses the right to retain or make deductions from the security deposit. Also, if the owner doesn’t have good reason to withhold the security deposit or part of it, the owner may have to return the amount withheld plus a penalty of double the security deposit.

The owner in the OAG settlement mentioned earlier got in trouble for failing to return itemized lists of deductions to outgoing tenants. In May 2021, the OAG launched the investigation into violations of the new security deposit law following complaints by New Yorkers who reported that their security deposits were being withheld by owners. The investigation found that the owner didn’t send itemized lists outlining its reasons for withholding security deposits, and therefore wasn’t authorized to keep the deposit. Additionally, the owner didn’t properly segregate the security deposits in escrow accounts as required by law.

The agreement requires that all unlawfully withheld security deposits are returned to former tenants and requires the company’s staff to receive compliance training to prevent future violations. The owner must also pay $10,000 in damages to the state and will be subject to a $2,000 penalty for every significant violation of this security deposit law in the future [In the Matter of Investigation by Letitia James of SGW Properties LLC, et. al., Assurance No. 22-006, March 2022].

‘Normal Wear and Tear’ vs. Damage

Damage to the property that’s normal wear and tear won’t be chargeable to the security deposit. So, it’s important to know the difference between the two:

• “Normal wear and tear” is the normal deterioration of the property that happens without negligence, carelessness, accident, misuse, or abuse by the tenant/tenants’ guests. Normal wear and tear can take on the form of gently worn carpets, loose door handles, fading wall paint and flooring, stained bath fixtures, lightly scratched glass, dirty grout, and mold that occurs naturally.
• “Damage” refers to the destruction that occurs because of abuse or negligence by a tenant during the course of the tenancy. It diminishes the usefulness, value, or normal function of the rental unit. It can include pet damage, broken tiles, holes in the wall, broken windows, and missing fixtures.

Quick Facts: NYC Security Deposits