INTEREST BEARING SECURITY DEPOSIT
Most resident security deposits are held in non-interest bearing accounts in a Florida banking institution. This is due to the fact that most property managers do not feel it is worthwhile to keep the funds in an interest bearing account, as under current Florida law, the manager will be required to account for the interest each year and either give this interest to the resident in whole or part. Often the banks will not impose their monthly fees if the account is non-interest bearing, as the banks are reaping the rewards of the money held by them. Even in light of Florida law, many property managers see these often large deposits building in the bank accounts and are desirous of keeping the interest for their company. If you have 200 residents each paying $500.00 in a security deposit, this amounts to $100,000.00 sitting in a bank, and potentially $5,000.00 in interest, assuming a 5% interest rate, being lost to the banks and not being received by the property manager. Unfortunately, Florida law simply does not allow the property manager to keep all the interest. This article will examine the current law regarding security deposits, how they are held and where the interest can go.
What Must Be Held In That Escrow Account?
Deposit money must be held in the escrow account. Deposit money is defined by Florida law as any money held by the manager on behalf of the resident, including, but not limited to, damage deposits, security deposits, advance rent deposit, pet deposit, or any contractual deposit agreed to between manager and resident either in writing or orally. "Security deposits" means any moneys held by the manager as security for the performance of the rental agreement, including but not limited to monetary damage to the manager caused by the resident's breach of lease prior to the expiration thereof. By the way, this definition is word for word from Florida Statutes Section 83.43 (11) and (12). As you can see, if you collect money from a resident and that money is not a “fee” but a potentially refundable “deposit” or “advance rent”, it must be retained in the escrow account and accounted for by the property manager.
The Non-Interest Bearing Account
Unfortunately, most deposit money is held in a non-interest bearing account for reasons previously mentioned. The bank retains all the interest, and the property manager and resident get absolutely nothing in return. If anything, the property manager may get their bank fees waived, and this is common practice in many banks. The money must be in a separate escrow account in a Florida banking institution.
The Interest Bearing Account
Florida law states that if the deposit money is held in an interest bearing account, the property manager has two choices when dealing with the interest.
Choice #1: The resident must receive of that interest paid at least 75% of the annualized average rate payable on such account. For the sake of simplicity, let’s say that the deposit was $1000.00 and the interest paid on that money was $50.00. The property manager can choose to give the entire $50.00 to the resident OR can give the resident $37.50 and retain $12.50 for the property management company.
Choice #2: The property manager must pay the resident 5% simple interest per year.
When and How Must Interest be Paid to the Resident if Choice #1 or #2 is picked?
While this may come as a surprise to many property managers, the interest must be paid to the resident directly or as a rent credit at least once annually, which means usually at the time of the lease end or renewal of the lease. Many property managers roll over the deposit money into a renewal, forgetting that they must account to the resident for the interest and pay this interest or credit this interest to the rent. While there is no specific penalty to a manager listed in the Landlord/Tenant Act, managers who are licensed by the Division of Real Estate could find themselves subject to a serious FREC complaint for a simple mistake such as this.
So You Still Want To Keep All The Interest?
Some of our clients, against our advice, specifically agree with the resident in writing in the lease agreement that the property manager shall retain all the interest on the deposits. These staunch believers in freedom of contract feel that if all parties are in agreement, it should be allowed and will not be challenged. Unfortunately, Florida law does not draw clear lines of when and where we can move outside of the Landlord/Tenant Act and contractually agree to something that is not specifically permitted in the Act. Florida Real Estate Law specifically allows parties to a sales transaction to agree who retains the interest on the deposits, but unfortunately, we do not have this specific authorization in the Act. We have seen clients who retain the interest in full audited on a regular basis, and the auditors have not cited them for this practice. If you choose to keep all the interest, do so at your own risk, and remember that in the event of litigated disputes, you always have to fear the potential of class action litigation. If you do the same or similar thing to all your residents, attorneys can and will sue you in a class action. This can result in huge sums, including attorney fees and costs, paid by your company to your attorney, whether you win or lose, AND the plaintiff’s attorney, if you end up losing in court.
- The Curable Noncompliance Examined PART 1
- THE CURABLE NONCOMPLIANCE EXAMINED PART 2
- THE WRIT OF POSSESSION – WHAT IT IS
- THE WRIT OF POSSESSION AND THE FULL UNIT
- WORK ORDER COMPANY POLICY AND THE LAW