In the course of giving legal advice on the subject of security deposits for rental properties, I have noticed clients repeatedly ask the same questions. I would therefore like to deal with the most common questions and important points in the following article.
It’s important to understand that the security deposit serves as a form of security for the landlord, particularly for claims that may be “discovered” after the end of the lease. These discoveries often involves damages to the rental property that are recognized only after the tenant vacates the apartment or for outstanding operating costs (such as yet-to-be-calculated heat and hot water bills) accrued by the tenant during the occupancy. Keeping this in mind allows us to understand why the deposit is not simply refunded to the tenant upon termination of the lease. But let’s start from the beginning.
1. Beginning of the rental contract
German law establishes the maximum permissible amount of a security deposit (§ 551 Para. 1 of the German civil code, or BGB). The deposit may amount to three months of “cold” rent (monthly rent without heating and other operating costs). The amount may be paid by the tenant in three installments, even if stated otherwise in the contract (Exception: Individual agreement expressly offered by the tenant). Rare exceptions regarding the amount of the security deposit may be granted only in rare cases involving parental guarantees, but this is not an issue we will discuss here. Important: It is highly recommended that the deposit be paid as agreed, since non-payment of the deposit is considered grounds for termination of the rental contract without notice — as in the case of two months of late rental payments per section 569 of the German civil code.
(2a) An important reason … is furthermore deemed to exist if the lessee is in arrears with regard to a provision of security in accordance with section 551 in the amount of a sum corresponding to twice the monthly rent.
The landlord is required to set aside the deposit separately from his or her assets (§ 551 Para. 3 BGB) in order to protect the tenant in the event of landlord insolvency and to exclude a bank from holding a lien on the funds. The law does not prescribe any specific way for setting aside the deposit. As a matter of practice, however, it is important that the fiduciary character of the deposit be recognizable to third parties (I recommend, for example, the creation of a subaccount connected to the rental account that contains within its name “Rental Security Deposit,” the name of the tenant, and, if possible, the rental contract number). Furthermore, the deposit is to be placed in an interest-bearing account — under the terms customary for savings accounts with a three-month notice period. (Landlords renting rooms in student and youth residences are exempted.)
Further key information in brief: The landlord’s right to demand a security deposit lapses within the “normal” limitation period of three to four years (This limitation period begins at the end of the year in which the claim for payment arises). The tenant has the right to request proof from the landlord regarding whether and how the deposit has been set aside. If the landlord fails to present this proof, the tenant may withhold rent payments up to the amount of the security deposit.
2. Using the security deposit during tenancy and at the end of the rental period.
Both landlords and tenants frequently come back with questions related to a still ongoing tenancy or one approaching an end.
Landlords often ask me if they may use the security deposit during the tenancy period.
In this context, the following scenario may arise: The tenant reports some kind of damage to the property. The landlord arranges for the repair, and afterward, is of the opinion that the work consisted of a so-called “minor repair” — a cost that is to be covered by the tenant. The landlord would like to use the security deposit to recover the cost of the repairs. The tenant, however, is of the opinion that the repair was due to a defect for which the landlord is financially responsible.
Germany’s Federal Court of Justice has made a clear decision regarding how a security deposit may be accessed or used during the period of tenancy. The landlord may access the deposit only if his or her claim is undisputed by the tenant. Since, in our example, the tenant denies the claim, the landlord may not access the deposit during the lease period. Also, such access cannot be contractually agreed on, since an agreement that would allow the landlord to use the security deposit funds in this manner would be seen as detrimental to the tenant and in violation of the statutory provision (§ 551 Para. 1) and would therefore be invalid according to § 551 Para. 4 of the German civil code.
If the landlord uses the deposit during the ongoing lease period, the tenant may demand a so-called “replenishment,” meaning the landlord must credit the withdrawn amount back to the insolvency-proof deposit account (Federal court ruling of 7.5.2014, VIII ZR 234/13).
On the tenant side, I’m often asked if it would be possible to apply the security deposit to the final (two) months of rent. Unless a tenant has made a corresponding agreement with the landlord, this is not possible for reasons stated at the beginning of the article. The landlord should indeed have the full security deposit available in the event of damages to the rental property that can only be assessed after the end of the tenancy period, when the landlord regains full access to the apartment. Also, since the final calculation of utilities can only occur after the end of the rental period — namely after the landlord comes into possession of the relevant document and bills — the landlord must be able to retain the security deposit in order to offset any additional operating costs that may arise. For these reasons, it is not permissible to treat the deposit as counting toward the final months of rent without the prior consent of the landlord. If the tenant attempts do so this without the landlord’s consent, the landlord would be able to make a legal claim for unpaid rent, and would win such a claim. In addition, the tenant will have to cover the costs of the legal procedure. For these reasons, attempting to use the security deposit in this way is highly inadvisable.
3. End of the lease
Ideally, after the end of the rental period, the former tenant vacates the apartment without the existence of any arrears for missed rental payments or other types of claims and receives the deposit in full plus interest.
Often, however, this ideal case does not materialize because the landlord refuses to refund all or part of the deposit. In some cases, the landlord fails to contact the tenant to provide an explanation and ignores written requests.
Generally, the landlord is given a six-month grace period in order to be able to assess any outstanding claims that may exist against the tenant. For this reason, the tenant should wait for six months.
In addition, the landlord may in exceptional cases withhold part of the deposit and make use of the so-called right of retention — namely, in cases in which the landlord considers it possible that the tenant will owe a subsequent payment for utilities and or other operating costs. This is illustrated by the following example:
The tenancy ends on the 31st of January and the apartment is handed over to the landlord. Then the six-month “waiting period” (from the tenant’s point of view) finishes at the end of July. In previous years, however, the tenant always owed an additional € 150.00 in utility costs based on his or her energy usage. However, since the landlord does not yet have the necessary documents to calculate the final utility costs for the previous year, the landlord cannot finalize the utility cost calculation at the end of July. In this case, the landlord may retain the anticipated amount that will be due — the average annual surplus for operating costs in previous years — plus a small security buffer; I would say 200 euros would be appropriate, in this case.
In cases in which the landlord has not refunded the security deposit following the six-month wait period, the tenant should establish a reasonable time limit (two weeks are sufficient, in my view) for the landlord to make final calculations and pay out the outstanding amount of the deposit.
The tenant should ensure that proof of the demand for the deposit refund along with the deadline for payment is established. If the landlord allows the deadline to expire without paying, he or she will be required to pay all the tenant’s costs — including the cost of a lawyer — due to so-called “damages caused by delay.” We therefore recommend the tenant take the following action: Have a third person — serving as a witness — make a copy of the signed original letter stating the deadline and demand for payment of the security deposit. This third person should then bring the signed original to the post office and send it to the landlord by registered mail. The delivery receipts should be kept together with the copy. The third person should also make the following note on the copy: “I sent the signed original on May 3, 2019 by registered mail to the recipient listed at the above address.” These actions make it possible for the tenant to prove both what was sent to the tenant and how it was sent in the event legal action is required.
4. Practical tips for tenants and landlords.
For the tenant, we recommend the following actions: Wait six months and then, as described above, write a letter to the landlord that serves as a “notice of default.” Should the landlord not pay within the two-week time limit, a lawyer should be commissioned. The landlord will have to bear the costs due to “damages caused by delay.”
For the landlord, the refund of the deposit can serve as a way to make up for the mistake. It is often overlooked that, for claims due to damage to the rental property, a short limitation period of 6 months applies (§ 548 BGB). If this period has expired, a landlord’s potential claim for damages or utility costs can no longer be asserted “actively,” since the tenant can argue the limitation period has expired. But, even after the limitation period ends, the landlord may still successfully petition to have a valid claim offset against a security deposit! So, in the end, if the tenant demands the security deposit following the limitation period, the two competing claims can be offset.
For this reason, as a landlord you should pay close attention to the order in which you assert your claims and to the wording of your communications with both the tenant and the court.