Security Deposit Transfer Agreement: Guide for Landlords and Tenants

Introduction

Key Things to Know

1. 1

   Security deposit laws vary significantly by state and sometimes by city, so the transfer agreement should be tailored to comply with local regulations.

2. 2

   The agreement doesn't change the terms of existing leases - the new owner must honor the original lease terms regarding security deposits.

3. 3

   Both buyers and sellers should keep copies of the agreement and related documentation for at least the duration of existing leases plus any statute of limitations for potential claims.

4. 4

   Security deposits must typically be transferred at closing, along with accurate accounting records for each deposit.

5. 5

   Some jurisdictions require security deposits to be held in separate interest-bearing accounts, and this obligation transfers to the new owner.

6. 6

   The agreement should specify how any pending deposit disputes or claims will be handled between buyer and seller.

7. 7

   Tenants retain all rights to their security deposits regardless of property ownership changes.

8. 8

   Failure to properly transfer security deposits can result in penalties, including potential damages beyond the original deposit amounts in some jurisdictions.

New York Requirements for Security Deposit Transfer Agreement

• Security Deposit Return Timeline (New York General Obligations Law § 7-108)

  Landlords must return security deposits within a reasonable timeframe after tenant vacates, not exceeding 14 days. The new owner assumes this obligation for existing tenants after property transfer.

• Separate Account Requirement (New York General Obligations Law § 7-103)

  Security deposits must be held in a separate, interest-bearing account in a New York State banking institution. The agreement must specify how these accounts will be transferred to the new owner.

• Interest Payment Obligations (New York General Obligations Law § 7-103(2-a))

  For buildings with six or more units, landlords must pay tenants interest earned on security deposits, minus 1% administrative fee. The transfer agreement must address accrued interest and future payment responsibilities.

• Written Notice of Transfer (New York General Obligations Law § 7-105)

  New owners must provide written notice to tenants when security deposits are transferred, including the name and address of the banking institution where deposits are held.

• Commingling Prohibition (New York General Obligations Law § 7-103(1))

  Security deposits cannot be commingled with personal or business funds of either the original or new owner. The transfer agreement must ensure continued separation of funds.

• Deposit Limit Compliance (New York Housing Stability and Tenant Protection Act of 2019)

  Security deposits are limited to one month's rent for most residential tenancies. The transfer agreement must verify that all deposits comply with this limitation.

• Rent Stabilization Compliance (New York Rent Stabilization Code § 2525.4)

  For rent-stabilized units, special rules apply to security deposits, including limitations on increases. The transfer agreement must identify rent-stabilized units and ensure compliance.

• Liability Transfer Provision (New York General Obligations Law § 7-105)

  The agreement must clearly transfer liability for all security deposits from seller to buyer, including responsibility for any claims arising before the transfer date.

• Itemized Deduction Requirements (New York General Obligations Law § 7-108(2-a))

  The agreement must acknowledge that any deductions from security deposits require itemized statements. The new owner assumes this obligation for all existing tenants.

• Banking Institution Notification (New York General Obligations Law § 7-103)

  The agreement must include provisions for notifying the banking institutions holding the security deposits about the change in ownership and account control.

• Truth in Lending Act Compliance (15 U.S.C. § 1601 et seq.)

  If security deposits are held in interest-bearing accounts, the agreement must comply with federal disclosure requirements regarding interest rates and terms.

• Fair Housing Act Compliance (42 U.S.C. § 3601-3619)

  The security deposit transfer must be handled without discrimination based on protected characteristics such as race, color, religion, sex, disability, familial status, or national origin.

• Servicemembers Civil Relief Act Protections (50 U.S.C. § 3901-4043)

  The agreement must acknowledge special protections for active-duty military personnel regarding security deposits and lease terminations.

• Record-Keeping Requirements (New York General Obligations Law § 7-103)

  The agreement must specify responsibility for maintaining records of security deposits, including original amounts, interest accrued, and any deductions, for the statutory period.

• Bankruptcy Protection Provisions (11 U.S.C. § 541(a)(7))

  The agreement must address how security deposits will be protected in the event of bankruptcy by either the seller or buyer, recognizing that deposits are not part of the bankruptcy estate.

• Indemnification Clause (New York General Obligations Law § 7-105)

  The agreement should include provisions for the seller to indemnify the buyer for any claims related to security deposits that arose prior to the transfer date.

• Escrow Requirements (New York Real Property Law § 282)

  For properties with significant security deposit holdings, the agreement may need to establish an escrow mechanism to ensure funds are properly transferred and accounted for.

• Tax Reporting Obligations (26 U.S.C. § 6049)

  The agreement must address responsibility for tax reporting of interest earned on security deposits, including issuance of 1099-INT forms to tenants when required.

• Electronic Fund Transfer Act Compliance (15 U.S.C. § 1693 et seq.)

  If security deposits are transferred electronically between financial institutions, the agreement must comply with federal regulations governing electronic transfers.

• Tenant Notification Timeline (New York General Obligations Law § 7-105)

  The agreement must specify the timeline for notifying tenants of the security deposit transfer, which must be done promptly after the property transfer is completed.