Security Deposit

We all have come across the situations when you have to shift into a new house. You have to find a place to move into, find the right owners, execute a contract or agreement between the landlord and the tenant, pay a monthly rent, etc. But before the tenant moves into new premises, the tenant is required to pay a lump sum amount known as a Security Deposit.

Most people, irrespective of the state they are located in (in India) have little to no idea about the amount payable as Security Deposit (up to one month or ten months, etc.), the clauses to be included relating to security deposit in the rental agreement, the repayment of the security deposit by the owner and so on. Knowing a thing or two about your leverage on the security deposit when it comes to house hunting can help you avoid any disputes or issues with respect to the rental or security deposit.

What Is Rental Deposit?

A landlord, while renting out his or her premises, expects a deposit amount which is usually a lump sum amount of a few months of rent. This amount is commonly and collectively termed as Rental Deposit or Security Deposit. The amount collected as security deposit usually varies from city to city, for example in Bangalore normally a 10 months rent is collected as the security deposit, in Delhi 3 months rent is the norm, in Chennai, it’s 1-6 months rent, and so on. The rental deposit may also vary from owner to owner depending upon the prevailing norms of that city or State.

The security deposit is refundable to the tenant upon the expiry of the lease period, or when the tenant opts out of residing at premises for some reason other than by serving a notice to the landlord. A rental deposit is generally collected by the landlord to serve as a safeguard against any damages made to or in the premises by the tenant. The landlord shall deduct a certain amount from the rental deposit (usually one month’s rent is deducted as painting charges from the refunded deposit amount, though the applicability of painting charges varies from place to place) in case any damage has been caused to the rented premises because of gross negligence or any other reason of the tenant.

Clauses In The Rental Agreement Relating To Security Deposit

A rental deposit clause is one of the most important clauses in any rental agreement between a landlord (or anybody authorized by the landlord to act on his behalf) and the tenant. Some of the points to be included in the rental deposit clause of the rental agreement are as follows:

1. The amount to be given as rental deposit, usually, an “X” amount should be mentioned along with the number of months the deposit is calculated on.

Example: The rent of a premise Rs 25,000/ month and the landlord stipulates that 2 months of rent is required to be given as security or rental deposit, then the rental deposit of Rs 50,000 should be paid by the tenant.

2. The clause will clearly state the conditions under which the security deposit amount shall be refunded to the tenant. This can be the time when the tenant vacates the rented premise or upon expiry of the lease period.
3. The tenant may also ask for an undertaking from the landlord stating that the rental deposit had been duly paid by way of cash, cheque, Demand Draft, Account transfer, etc. It should also be mentioned that the amount given to the landlord as rental deposit shall be subsequently returned without any interest being charged on it.
4. Notice period works in two ways, that is, both the landlord as well as the tenant can make use of it. It is the period of time that a landlord gives a tenant for vacating the premise or the tenant has to serve (when he wants to shift to another premise) to enable the landlord to find new occupants or tenants and to also give him sufficient time to arrange for the security deposit that he had earlier collected from the tenant.  A notice may be stipulated for a period of 1 or 2 months before which an individual has to comply with which is also known as the notice period.

Example: If a rental deposit of 9 months rent is made as per the rental agreement and the notice period to be served by the tenant is 1 month when notice is to be served, the rent for the notice period of 1 month is adjusted against the security deposit and the remaining 8 months of rental deposit is refunded back after making deductions, if any are applicable.

5. The stipulated time frame within which the security deposit must be refunded to the tenant after if any applicable reasonable deductions are made by the landlord.

Example: Though the tenant paid Rs 1,00,000 as security deposit (for 10 months rent), the owner refunded only Rs 90,000 to the tenant after the expiry of the lease. The Rs 10,000 that was cut in painting and other charges, is acceptable if stipulated in the rental agreement.

6. Sometimes a tenant may opt to pay a lump sum amount for the rental deposit with the stated express understanding that part of the rental deposit advanced would be adjusted against future monthly rentals. A premise in which certain work is in progress, such as fittings, fixtures, furnishing, etc. are yet to be completed or fixed for which the landlord may not have the finances, the tenant may temporarily cover those expenses with the understanding that the rental deposit so paid to cover the same is adjusted against future rentals.

Example: If a tenant pays Rs 1,00,000 as a rental deposit to his landlord with a written understanding that Rs 50,000 would be the ultimate deposit and the balance Rs 50,000 would be adjusted against the next 5 months’ rent at the rate of 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.

7. A rental agreement shall also state the reasonable deductions to the security deposit that shall be made by the landlord in case any damages to the property are found.

Example: If the ceiling of the rented premises is found to be excessively dirty or have permanent markings on the same, then the landlord shall make reasonable deductions from the rental deposit or the tenant can either offer to repaint that portion of the house or ceiling.

8. Sometimes, an owner may insist on a minimum lock-in period. A lock-in period is 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. A lock-in period benefits a landlord because it assures him or her a guaranteed fixed income during the lock-in period. If a tenant opts to vacate the premises before the lock-in period is completed, then a portion of the rental deposit shall be forfeited either partial or full, depending on the rental agreement. However, if a tenant is forced against his will to move out of a rented premise after a lock-in period has been agreed and before the said lock-in period is completed, then the tenant shall have no obligation to hand over possession of such rented premise before he has been compensated for the losses incurred to him due to non-refunding of the rental deposit or premature termination of the lock-in period.
9. The damages against which the rental deposit serves as security shall not extend to include normal wear and tear of the rented property that generally occurs during the course of the tenancy.
10. The entire rental deposit is not returned as some amount is retained by the landlord to pay the utility bills.

What do you do as a tenant if you have not got your security deposit back?

After a tenant has vacated the rented premises, the primary obligation of the landlord to the tenant is to return the rental deposit collected at the time of renting the premises. As a tenant, what can you do if hypothetically your security deposit is not refunded or some amount of the deposit is arbitrarily withheld by the landlord under the pretext of damages caused to the property or otherwise?

Answer: If an owner has resorted to something of the sort, then it causes a breach of contract because the landlord is bound by the rental agreement to return the said rental deposit after proper deductions have been made. What tenants usually do is retain the key of the premise until the final settlement is made. In case of prolonged non-refunding of the rental deposit, the tenant may also charge an interest or resort to civil litigation.