Landlords often require tenants to pay a deposit of some sort at the time the parties sign a lease or rental agreement. Most of the time, the deposit is called a security deposit, but it’s not unusual for landlords to also collect a sum they designate as “last month’s rent.” Collecting a deposit that’s earmarked to be applied to the last month’s rent isn’t always a good business practice for landlords. (Landlords should also understand the tax implications of collecting advance rent.)
How Landlords Can Legally Use Last Month’s Rent Deposits
Landlords who collect a deposit earmarked as last month’s rent can apply it in only one way: as an advance payment for the tenant’s last month residing in the rental unit. Proper use of a last month’s rent deposit would look like this:
On February 1, Jayme and Robin sign a lease for six months at $1500 per month, due on the first of each month, with plans to move in immediately. At signing, they pay the landlord, Alex, a security deposit plus first and last month’s rent. This initial payment covers rent for February. Jayme and Robin pay March, April, May, and April’s rent on time. When May 1 arrives—the date their last month’s rent is due—they do not have to make another payment, as Alex already has their last month’s payment. Jayme and Robin move out on May 31 as planned.
The example above demonstrates the only way that a last month’s rent deposit should be applied.
How Landlords Can’t Use Last Month Rent Deposits
In an ideal situation, tenants don’t damage a rental beyond normal wear and tear, and they leave a rental having paid rent in full. As most landlords have experienced, though, not every tenancy ends smoothly, and it’s a mistake for landlords to believe that collecting a last month’s rent deposit provides much additional protection. Landlords cannot use last month’s rent deposits to cover any of the following:
- Damage to the rental. Using the hypothetical landlord and tenants above, what would have happened if Jayme and Robin paid a security deposit of $1000, paid rent in full, but caused $3000 in damages to the rental unit? Alex, their landlord, would not be able to apply any of the last month’s rent deposit towards repairs—even though the money was already in Alex’s possession. Rather, Alex would have to apply the money to only the last month’s rent, then separately account for and demand payment for all damages. Because the $1000 security deposit isn’t enough to cover the cost of repairs, Alex will likely have to sue Jayme and Robin for the remaining $2000. The situation is the same even if Jayme and Robin inadvertently made an extra last month’s rent payment on May 1—as sometimes happens when tenants set up automatic bill pay to their landlord. Alex would have to refund the additional $1500 May rent payment, even though Jayme and Robin owe $2000 to cover the cost of repairs.
- Rent owed from any month besides the last month. For example, if Jayme and Robin didn’t pay rent in April, then moved out in May, Alex would still only be able to apply their $1500 last month’s deposit to May. Alex would be able to apply the $1000 security deposit toward the rent owed for April, but would have to collect the additional $500 rent owing for April.
- Late rent or other fees. If Jayme and Robin paid March rent late and incurred late fees, Alex could not use the last month’s rent deposit to cover the late fees—rather, Alex’s only resource in hand is to draw the fees from the security deposit.
- Pet-related damages. Just like human-caused damages, the last month’s rent deposit cannot be used to fix damages caused by pets—instead, landlords must use a general security deposit or pet deposit to cover these expenses.
Landlords who attempt to apply last month’s rent deposits to any of these costs are violating the terms of the lease or rental agreement, and could face penalties if their tenants challenge the use in court.
What Landlords Should Collect Instead of Last Month’s Rent
Rather than sideline a large portion of the deposit collected at the beginning of a tenancy towards last month’s rent, landlords should consider other options.
Before deciding whether to collect last month’s rent deposits, landlords should review any applicable security deposit laws. Most states, and some areas with rent control, place limits on security deposits—no matter whether it’s designated as a security deposit or last month’s rent. For example, in Arizona, landlords cannot demand or receive a deposit—including prepaid rent—in an amount of more than one and one-half month’s rent. (Ariz. Rev. Stat. Ann. § 33-1321A (2020).) That means that if an Arizona landlord charges $1000 per month for rent, the most the landlord can collect as a deposit is $1500. If the same landlord earmarked $1000 of that deposit as last month’s rent, the landlord is left with only $500 that can be applied to remedy damages or rent owed for other months.
When a state doesn’t set a limit on deposits, landlords are free to charge as much for a security deposit as they choose, limited only by what potential tenants are willing to put down. In these situations, landlords could collect the last month’s rent in addition to the security deposit. Again, how much landlords can actually charge would be limited by what’s considered reasonable for the local market.
In states or areas with limits on deposits—in other words, most areas—landlords are far better served by not designating any part of the deposit as last month’s rent. Rather, landlords should simply collect the maximum deposit allowed under state law (or local law, if applicable), and designate it all as a security deposit.
Having a deposit labeled generally as a “security deposit” allows landlords the most freedom in how they can apply the funds. Security deposits can be used to cover the costs of repairs to the unit, damage to fixtures and furniture, late fees, bounced check fees, rent owed, and whatever else the law and terms of the lease or rental agreement allows.
Because every state’s law is different—and because local rent ordinances or other laws could apply—landlords who are unsure about deposit laws should consider contacting a local landlord-tenant attorney to discuss the rules in their area.