Q: My local landlord-tenant ordinance requires that I pay interest on tenants’ security deposits.
The ordinance doesn’t specify how the interest should be paid.
To make things simple, I plan on giving tenants a credit once a year on their rent for that month.
Is this a good idea? –Judith J.
A: A few states, and several cities, require landlords to pay interest on tenants’ deposits, and many of these laws and ordinances do specify how those payments should be made. Some allow landlords to do as you suggest, and others require landlords to pay interest directly to the tenant.
Because you have a choice, consider paying the interest directly to the tenant instead of accepting less rent. Practical considerations underlie this advice.
First, your check provides a clear and easily found written record that you did indeed pay the interest owed. Having that readily available will be handy if a dispute arises over whether you followed the law.
Second, suppose your tenant fails to pay the rent and you need to serve a notice to “pay or quit”? If the amount of rent you demand does not take into account any interest owed, you may find your tenant fighting the notice on the grounds that it incorrectly states the rent (when these notices fail to demand the exact amount of rent due, a judge may find that they are deficient, which would end your lawsuit and make you start over). To prevent a tenant from raising this defense, you could attach a check for the interest owed to the pay or quit notice ¦ but why not simply pay by check in the first place?
Landlords who are not legally required to pay interest on deposits might consider doing so anyway. You’ll gain a marketing edge and score big with your tenants. From their point of view, it isn’t fair for landlords to be making money on the deposit.
Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of “Every Landlord’s Legal Guide” and “Every Tenant’s Legal Guide.” She can be reached at firstname.lastname@example.org.