One crucial distinction when discussing security deposits is whether they pertain to a commercial or residential lease. This distinction is vital because it determines the laws governing these deposits.

In New York State, the regulations surrounding commercial lease security deposits are specified under New York State General Obligations Law section 7-103. This law defines security as money deposited or advanced on a contract or license agreement for rental property. It serves as security for the tenant’s performance under the agreement and can be applied to payments when due. Importantly, section 7-103 mandates that the deposited funds remain the property of the tenant, even when handed over to the landlord. Landlords are obligated to hold these deposits in trust for their tenants.

Security deposits are common among landlords in residential and commercial property leases. These deposits are a financial safeguard to ensure tenants fulfill their lease obligations. But what exactly is a security deposit? It’s a sum of money provided by the tenant to the landlord, held for the duration of the lease. Typically, security deposits are in the form of cash and are securely stored by the landlord. In some cases, alternative forms of security, like standby letters of credit or personal guarantees, may be accepted, but we’ll focus on cash deposits in this article.

It ensures that security deposits:

Why is this Trust Requirement in Place for Security Deposits?

It cannot be commingled with the landlord’s funds.
It must be placed in a segregated account.
It can only be used if the tenant defaults on the lease or as specified in the lease terms.
Additionally, when the security deposit pertains to rental properties with six or more family-dwelling units, it must be deposited in an interest-bearing account within a New York State banking institution.

This may be relevant to many commercial spaces located in mixed-use buildings. In such cases, landlords are entitled to retain a one percent (1%) administrative fee holding the security. Any other interest earned can be either held in trust until the lease ends, used for rental property expenses, or paid to the tenant annually.

For larger commercial landlords, managing security deposit funds, tracking interest earnings, and ensuring proper ownership documentation can be complex tasks. Compliance with legal standards and obligations demands substantial knowledge and oversight. At Wright Law, we specialize in the intricacies of commercial security deposits, providing expert guidance on their administration.