Do you collect a first and last month’s rent upon move-in? Do you also collect a separate amount as a security or damage deposit? Do you know how to properly treat these funds in accordance with state law?
In some states collecting last month’s rent on move-in is treated the same as a security deposit. Essentially, rent collected in advance is not considered rent until it is due and payable. Be careful that you observe that law. Penalties for noncompliance can be severe. The safest thing to do is to simply collect a sufficient amount of security deposit to mitigate risk, and not generate some complex scheme.
One fallacy in collecting the last month’s rent is that you never know for certain when that last month will be. Let’s say you have a 1 year lease and your tenant has paid you in advance for the last month’s rent. Six months into the lease, she stops paying rent because she lost her job. She tells you she hopes to have a new job soon. You inform her she must move or pay rent. When can you apply the last month’s rent? Technically, it is not disbursable until it becomes due and payable, which is her last month occupying the premises. What if she remains in the property for more than a month from your demand to move? If you disbursed funds, you may be deemed in error and even in breach of agreement.
Here’s another problem this policy creates: Can you process for eviction after delivering demand to pay or move, even though you have the last month’s rent on deposit? How will a judge interpret that? There would be no question at all about it if the money was held as a security deposit, but as last month’s rent, the answer is not so clear. I would not want to test that defense.
Daniel R. Wilhelm
3 Options Realty, LLC.
The author of this Blog is not an attorney. Nothing written should be construed as legal advice. Conclusions conveyed are outcomes based upon practical experience and should not be depended upon to be a common outcome of other similar circumstances.