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Must Know Facts About Security Deposit

posted in Rental Agreements by

Everyone is aware that while renting a house, a tenant is required to pay some money upfront to the owner of the house. But many individuals are unaware of the facts associated such as how much money has to be paid upfront as security deposit and what are the important things to be included in the rental deposit clause of rental agreement. Knowing these will certainly help you to be on the safer side.

Rental Settlement Agreement

What Is Rental Deposit?

While renting out any premises, a landlord expects a deposit amount which is usually certain months of rent. This amount is commonly known as Rental Deposit or Security Deposit. The amount collected as security deposit usually varies from city to city, for e.g, in Bangalore- 10 months rent is taken as security deposit, Delhi- 3 months, Chennai- 6 months, and so on. It may also vary from landlord to landlord depending upon the prevailing norms.

The security deposit is refundable to the tenant once the lease period is over or when the tenant opts out of the premises for some reason or the other by serving a notice to the landlord.

A rental deposit is generally a safeguard for the landlord against any damages made to the premises by the tenant. The landlord shall deduct a certain amount from the rental deposit in case if any damage has been caused to the rented premises because of the tenant.

Rental Deposit Clause In The Rental Agreement

One of the many important clauses in the rental agreement between the landlord or anybody authorised by the landlord and the tenant is a rental deposit clause.

Some of the important points that should be kept in mind with regard to the rental deposit clause of the rental agreement are as follows-

  1. The amount to be given as rental deposit, usually an “X” amount. For e.g.- If the rent is Rs 15,000/- per month and the landlord usually takes about 2 months of rent as rental deposit, then the rental deposit shall be Rs 30,000/-.
  2. The clause shall clearly specify when the amount shall be refunded i.e. at the time of vacating the rented premise or at the end of the lease period.

    Before leaving the premise, the tenant has to serve a notice to the landlord to enable him to find new tenants and to also give him sufficient time to arrange for the security deposit that he collected from the tenant. The notice may be served 1 or 2 months before leaving such premises. This is known as notice period.

    For e.g, if 3 months rental deposit is made as per the agreement and 2 months is the notice period, when the notice is served, the rent for the 2 months notice period is adjusted against the rental deposit and the remaining 1 month rental deposit is refunded back after making deductions, if any.

  3. The maximum time within which the rental deposit shall be refunded back to the tenant after reasonable deductions are made by the landlord.
    E.g- At the time of removal of the tenant’s physical self from the premises etc.
  1. In certain cases, the tenant gives a lump sum rental deposit with the understanding that part of the rental deposit would be adjusted against future monthly rentals.E.g- A premise in which certain works like fittings, fixtures, etc are to be done for which the landlord may not be having the finances, the tenant may temporarily foot those expenses with the understanding that the rental deposit so paid is adjusted against future rentals leaving a reasonable sum as deposit.So for instance, if a tenant pays Rs 2 lakhs as rental deposit to his landlord with an understanding that Rs 50,000 would be the ultimate deposit, then the balance Rs 1,50,000 would be adjusted again for 15 months’ rental (at Rs 10,000 every month). In such cases, the actual rent would be incurred when the tenant moves into the premises. At the time of vacating the premises the tenant would be entitled only to Rs 50,000 rental deposit and any unadjusted monthly rental, if the premises is vacated before the lease period.
  1. It shall also state that reasonable deductions shall be made by the landlord in case damages are found on the property. For e.g- If the walls in the rented premises have been found to be dirty or have pen/pencil markings on them, the tenant can either offer to repaint that portion or the landlord shall make reasonable deductions from the rental deposit.
  1. Certain landlords may also insist on a minimum lock-in period. A lock-in period is basically a period during which both landlord and tenant cannot terminate the rental agreement unilaterally unless the period is over but may do so with mutual consent. It is highly advantageous to the landlord as he shall be getting a guaranteed fixed income during the lock-in period. If the tenant wishes to vacate the premises before the lock-in period is over, then the rental deposit shall be forfeited depending on the agreement, which may be either partial or full. However, if the tenant is forced to move out of the tenanted premise before the lock-in period is over, he shall not hand over possession of such premise before he has been duly compensated for the losses incurred to him due to non-refunding of the rental deposit.
  1. The damages against which the rental deposit acts as a security shall not include normal wear and tear that generally occur in the course of the tenancy.
  1. The tenant may also take an undertaking from the landlord that he paid the rental deposit by way of cash/ cheque/ Demand Draft/ Account transfer, etc.
  1. In case of premature determination of lease either by the tenant or landlord, the amount shall be adjusted towards the notice period rent payments and only the balance shall be paid to the landlord.
  1. It shall also be mentioned that the amount that is given to the landlord as rental deposit shall be subsequently returned and will be interest free.
  1. The entire rental deposit is not returned as some amount is retained by the landlord to pay the utility bills.
As per a 1996 Supreme Court judgement in K. Narasimha Rao v. T.S Nasimuddin Ahmed, Civil Appeal no. 3823 of 1996, the Supreme Court has held held that the landlord is entitled to receive only one month agreed rent by way of advance and any amount paid in excess of agreed rent of one month by way of advance shall be refunded by landlord to tenant or adjusted towards rent”. However this judgement is unknown to many and not followed till date.

Frequently Asked Question (FAQ)

  1. I have not got my rent deposit back? What should I do as a tenant?

The returning of the rental deposit taken at the time of renting the premises is one of the primary obligations of the landlord after the tenant has vacated the premises. However, what happens in cases where such amount is not refunded back or some amount of money is arbitrarily withheld by the landlord in the pretext of damages caused to the property. In such cases it causes a breach of contractual obligations as the landlord is bound by the rental contract to return the rental deposit after proper deductions have been made.

The most common practice by tenants is to retain the key till the final settlement is made. In case of prolonged non-refunding of the rental deposit, the tenant may also charge an interest on the amount to be refunded back as rental deposit. However, as a last resort, all kinds of civil remedies are still available to the tenant  for recovering their legitimate money.

31 Dec, 15

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