It's common practice for landlords to collect a security deposit when a new tenant moves in. The purpose of that deposit is to protect landlords from paying for damage that could ensue in the course of a lease agreement.
But some states are now allowing tenants to use funds being held as security deposits to cover their rent payments. And while that might seem like a good idea in theory, it may not work out well in practice.
A solution with the potential to backfire
Generally speaking, security deposits can't be used to cover rent until a lease agreement runs out. At that point, if there's unpaid rent, a landlord is usually allowed to keep a security deposit to cover a delinquent payment.
During the COVID-19 crisis, however, some states are allowing tenants and landlords to use previously paid security deposits to cover rent. And that's both a good thing and a bad thing.
On the tenant side, using a security deposit for rent could spell the difference between staying current and being delinquent. Right now, there are eviction bans in place that protect renters from being forced out into the street during the pandemic, but once those expire, tenants will be expected to keep up with their financial obligations under their lease agreements or otherwise risk losing their homes. And that could include quickly having to repay lump sums of rent that were previously unpaid. The option to apply a security deposit toward rent could therefore help struggling tenants avoid eviction -- and stress -- as they work to get back on their feet.
But from a landlord perspective, using a security deposit to take the place of rent is less favorable. If a security deposit, which usually amounts to the equivalent of one month's rent, is used to make a landlord whole in the absence of a monthly payment, that same landlord could be left in the lurch if property damage occurs.
Landlords are not allowed to keep security deposits to cover normal wear and tear on a rental property -- things that don't result from negligence or rule-breaking. But damage beyond normal usage occurs all the time, and if landlords use their tenants' security deposits to cover rent payments, they won't have that money available to make repairs when doing so becomes necessary.
As such, while using security deposits for rent may be an OK deal for tenants since they don't really lose anything in the process, landlords may be getting the short end of the stick. This especially holds true when there are laws in place that prohibit landlords from requesting an additional security deposit during periods of crisis like the one we're grappling with today. (In New Jersey, for example, landlords who use a tenant's security deposit as rent cannot request another one until at least six months after the COVID-19 emergency ends or a new lease is signed.)
Instead of using security deposits to cover rent, landlords should instead aim to work out payment plans with their tenants where they at least receive a portion of their regular rent on schedule. Otherwise, they could lose out big time.