Why landlords frown upon prepaid rent

Rent it Right

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted May. 18, 2011

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Rent it Right

Janet Portman
Inman News™

Q: We are moving from our home to a rental, the result of a job loss and foreclosure. The landlord, focusing on my unemployment, is concerned that we won't be able to pay the rent. We have enough savings; so I've offered to prepay the rent for several months, but he says he can't legally accept it. Is there any reason why I shouldn't be able to prepay the rent? --Walter W.

A: Your landlord's hesitations are understandable, particularly if your state, like most, limits the amount of security deposit a landlord may require. In many states, any money collected up front (other than the first month's rent) is legally considered a returnable deposit.

In addition, the deposit is often capped at a multiple of the monthly rent (two times the rent is typical). By accepting several months' worth of rent, your landlord is afraid that he'd be violating the security deposit law.

The idea behind limiting the deposit is two-fold: First, by prohibiting very large deposits, it levels the applicant field somewhat. Applicants who may be able to make the rent, but do not have a huge reserve of cash for the deposit, won't be kept out of the running.

But it also prevents large-scale mischief at the other end of the landlord-tenant relationship. All too frequently, landlords unjustifiably keep all or a portion of a tenant's deposit, and many tenants don't fight to get them back. When the deposit is limited in size, the damage done by these unscrupulous landlords is at least lessened.

That said, there are situations when upfront payments of rent that exceed the security deposit limit are in everyone's interest. Legislators in New Jersey have figured this out, and have proposed amending their security deposit law, which caps the deposit at one-and-one-half times the monthly rent (AB 3236).

The new law would allow tenants to prepay rent, which would not be considered a deposit, and would be held in trust for the tenant and withdrawn by the landlord as rent payments come due. The change is designed to address situations just like yours, when tenants are unemployed but have enough reserves to cover several months' worth of rent. It's difficult enough to be out of work, but to be kept out of a rental market simply because you are forbidden from prepaying the rent is doubly hard.

Mind you, leaving the landlord with a large pile of money does have its risks. By describing the money as held "in trust," the law makes the landlord a custodian of the tenant's money, with authority to use it only for rent as rent comes due. But legal niceties aside, the landlord will still have access to a sizable sum.

If relations go south -- for example, the tenant has to leave the rental for perfectly legitimate reasons, such as the landlord's failure to maintain its habitability -- the tenant will be entitled to get that money back. Unless the landlord repays it voluntarily, this will require a lawsuit.

Tenants should keep this in mind when prepaying for many months' rent: It's one thing to walk away from a modest deposit, but it's another thing entirely to forgo many thousands of dollars.

Q: We own an old house that we've been renting out for several years, but now we're ready to sell and retire. The current tenants, who have lived there four years, want to buy, but they've offered too little. They're claiming that the improvements they put into the property -- new floors, fixtures, carpeting -- were done in anticipation of purchasing the house someday, and now they want to be reimbursed. We knew about the improvements, but there was no discussion about reimbursement. What should we do? --Cathy and Charles P.

A: When tenants want to make improvements, they should always consult with the landlord first. Most leases and rental agreements require this, and for good reason: The landlord owns the property, not the tenants. And the landlord will want to approve any changes that modify the property rather than simply beautifying it temporarily for the tenants' enjoyment.

In legalese, changes that modify the property are said to be "affixed" to it, because they become part of the property itself (unlike, for example, a piece of furniture or an area rug that will travel with the tenants). But tenants' interests are at stake, too, because these structural changes become the property of the landlord unless the owner agrees otherwise.

In other words, despite what tenants might think or consider fair, once that faucet is installed, it no longer belongs to the tenant unless the landlord agrees. Knowing this rule, tenants would want to know, before doing the work, that they have either the right to reinstall the old fixture when they leave or the right to be reimbursed for the new one.

You might think that you would be justified in saying, "Tough luck!" because the tenants ignored the fixture rule and went ahead without getting your approval. That's not necessarily so. If the tenants were to take you to court and sue for the value of their improvements, a judge would look beyond the letter of the law and consider the whole picture.

The whole picture involves what's right and what's fair, not just what the legal rule says. (In England long ago, there were actually separate courts set up to consider matters of fairness, known as courts of equity.)

In the U.S., a judge will take a hard look at whether applying the fixture rule without moderation -- in other words, telling the tenants that they blew it and you now own everything they affixed to the property -- amounts to "unjust enrichment" for you.

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