Security deposit interest could be substantial upon move-out

Rent it Right

Q: I’ve lived in my Virginia apartment for the past 22 years, and I’m planning on moving soon. When I moved in, I paid a deposit of $200. The landlord says I have not been earning interest on this money; when I pressed him, he said he’d check into it. What are my rights? –James T.

A: Most states do not require landlords to pay interest on tenants’ security deposits, and these days, with interest rates so low, deposits that have sat in a landlord’s business account for even a few years will earn a paltry sum. But some states do require interest, and luckily for you, Virginia is among them. (Virginia Code Section 55-248.15:1.)

Interest earned on a Virginia deposit won’t be any more exciting than anywhere else, but when you talk about 22 years’ worth, you’re looking at a more significant sum.

Virginia’s law is a bit tricky. It starts out simple enough: Interest is paid at the end of the tenancy, and deposits begin earning interest as of the date the landlord collects them. The tenant must have lived continuously in the rental for at least 13 months.

Now for the tricky part: To calculate interest, which must be done on a yearly basis, the landlord applies a rate that is four percentage points below the Federal Reserve Board discount rate as of Jan. 1 of that year. For example, if you moved in on March 1, 1990, on March 1, 1991, the landlord should have checked the federal discount rate for Jan. 1, 1991, subtracted four percentage points, and applied that multiplier to your $200. On March 1, 1992, the landlord would do the same thing — except that the interest rate would be applied to the current deposit, which had been enlarged by the past year’s interest payment (hopefully). As you can see, this system requires landlords to make yearly calculations and apply that year’s interest rate to the ever-growing deposit.

Readers who are familiar with the current rate — and who remember rates in the early ’90s — may be tempted to dismiss this as an academic exercise. Today’s rate is a meager 0.75 percent, and early ’90s rates were not consistently above 4 percent. But over the whole 22 years that your deposit has sat in the landlord’s bank account, sub-4 percent rates haven’t always been so. The website of the Federal Reserve Bank in San Francisco gives a handy historical chart of past rates, and it shows that some years were above 4 percent. For those years, your deposit would have earned some money.

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It’s up to your landlord to do the math required to arrive at the current size of your deposit. True, for years when the federal rate dipped below 4 percent, your deposit earned nothing. But in the few years when the rate rose, you were entitled to a bump in that deposit, however modest.

Q: We have a small apartment building whose units we rent on a month-to-month basis. A couple who applied asked for a lease, which we don’t want to give. We prefer the flexibility of a month-to-month arrangement, and if tenants are good, we have no reason to terminate, so they essentially have a lease anyway. How should we answer this request? –Tim and Laura P.

A: There’s a lot to be said for a policy such as yours, if you are in fact able to find tenants who will accept the uncertainty of a month-to-month setup. But from the point of view of most tenants, though they may be able to leave on short notice with a monthly arrangement, they are also subject to rent increases, also on relatively short notice, not to speak of a termination. Having a lease gives tenants a guaranteed rent, though it does obligate them to stay for a substantial period of time. Most people have plans that go out at least a year, and are comfortable committing to a place for that long.

That said, you report that such a policy has worked for you. So, because in the majority of situations tenants are not entitled to a lease as opposed to a month-to-month rental agreement, you can stick to it if you like. Be careful, however, that you don’t inadvertently give your applicant the idea that the monthly setup "is as good as a lease."

For example, refrain from explaining that stable monthly tenants "essentially have a lease anyway," as you write. Why? Because you may be giving your tenants a legal argument that you have orally changed the nature of the tenancy from a month-to-month arrangement to an oral lease. This may be what you hear if, for example, you decide to raise the rent after a few months. In response, your tenants may argue that by assuring them that they "essentially" had a lease, they "essentially" had one of the protections a lease affords: no rent increases until the lease is renewed.

Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of "Every Landlord’s Legal Guide" and "Every Tenant’s Legal Guide." She can be reached at janet@inman.com.

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