Essential Security Deposit Info for Rental Property Purchasers

Jul 21, 2023
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Navigating Your First 30 Days in New York

By: Ariel S. Holzer, Esq. with contributions from Brice Wilkerson and Elysse Anderson

If you have recently become the owner of a rental property in New York, you are likely already aware of the myriad responsibilities that come with being a landlord. What you might not be aware of, however, are the potential challenges of inheriting undisclosed—or  inadequately funded—security deposit liabilities from the previous landlord, which could lead to higher-than-expected costs for you and disputes with your newly inherited tenants.

Understanding these potential challenges and your rights as the new owner of a rental property will help you safeguard your investment, protect your financial interests, and ensure compliance as you take on the responsibilities of operating your new rental property.  

Are you buying or have you recently closed on a rental property?

Landlords have a legal obligation to pay back their tenants’ security deposits, at the end of the tenancy, less any lawful deductions. Landlords are also obligated to safeguard these security deposits, including when a landlord’s ownership of the property comes to an end.  Under New York’s General Obligations Law (“GOL”), a landlord selling their rental property usually transfers this legal obligation to the buyer – to you.[1] So, as the purchaser of the seller’s rental property, you—the  new landlord—are responsible for returning your newly inherited tenants’ security deposits.

What happens if the selling landlord didn’t tell you about or accurately document one or more security deposits?

For every tenant’s account in which the selling landlord neither provides a security deposit, nor documentation supporting a balance less than described in a lease, you may be liable for the full lease amount, or for whatever amount the tenant can prove they previously paid.

Thankfully, you have a (limited) window to mitigate this liability – You must alert your inherited tenants within 30 days of closing, by written notice, that you did not receive their full security deposit balances.[2] Your inherited tenants then have 30 days to produce “documentary evidence” to prove the existence of any potential security deposits. Under the GOL, documentary evidence inherited tenants may rely on is limited to canceled checks, payment receipts, and signed leases.

After 30 days, any tenants who fail to provide qualifying documentary evidence forfeit their right to hold you liable for any security deposit as their new landlord, regardless of what they may have previously paid, or what may have been in an old lease. But—if you miss this window—then your inherited tenants may produce evidence to hold you liable for their full security deposit balance at any time. The form such evidence may take won’t be limited to the GOL’s narrow definition of “documentary evidence.”

Okay, so you gave timely notice, but now some of your inherited tenants have produced documentary evidence. What is your recourse?

Just because there were deposit balances or disputes not addressed prior to closing, doesn’t mean you must bear all the costs of paying the deposits back. The GOL provides you with explicit remedies as against the selling landlord which—if applicable—entitle you to financial compensation.

For assistance in navigating these circumstances and other landlord-tenant and commercial real estate matters, contact FRB's Real Estate Practice Group or submit the form below for a free consultation.

[1] N.Y. Gen. Oblig. Law § 7-105 (2021).

[2] N.Y. Gen. Oblig. Law § 7-108 (2021).

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.

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