What is a security deposit?
Landlords in Singapore usually require tenants to provide a sum of money at the start of a lease as a security to ensure that the tenant performs the lease and returns the property in an acceptable manner. In the event of the tenant’s default, the landlord may use the security deposit in accordance with the lease to mitigate the landlord’s loss. At the end of the lease, the landlord is obligated to return the security deposit to the tenant, less any deductions that the landlord is allowed to make under the lease agreement.
The security deposit usually makes its first appearance in the Letter of Intent (“LOI”). The LOI is an expression of intention from the landlord to the tenant to let the premises. It usually contains the commercial terms of the lease such as the identities of the parties, the address of the property to be leased, the area of the premises, the lease duration, amount of rent, payment terms and the security deposit required. The terms and conditions of the lease are usually set out in another document.
In this article, we explore what are the matters that a landlord and tenant should pay attention to when asking for or giving a security deposit.
Why is a security deposit necessary?
A landlord bears the risks of a tenant’s default in a lease.
A landlord suffers a loss if his tenant fails to pay rent, terminates the lease prematurely or returns the property damaged at the end of the lease. In such circumstances, the landlord will have to make a claim against the tenant to recover his losses. Such a process can be costly and time-consuming, especially if the tenant is no longer around. As a result, it is a common practice for landlords to hold security from his tenant, to ensure that the tenant performs the lease.
How much security can the landlord ask for?
The obligation for the tenant to provide a security deposit is contractual; there is no general obligation in law for the tenant to provide a security deposit or amount prescribed by law. It is up to the parties to negotiate for an amount that works for them.
In general, the amount of security deposit can range from one to three months’ of the gross rent. The amount varies depending on a myriad of factors including the duration of the lease, the nature of the lease (residential, commercial, retail or industrial) and the relative bargaining powers of the parties.
For example, in a commercial setting, a landlord may ask for more security deposit if the landlord is not confident of the tenant’s finances, or a prospective anchor tenant can negotiate a smaller security deposit. In a residential lease, a landlord may ask for more security deposit if the tenant is a foreigner and the tenant’s employer does not guarantee the lease.
What can the landlord use the security deposit for?
As the security deposit is a contractual term to be agreed between the landlord and the tenant, the landlord may only use the security deposit in accordance with the lease agreement. It is important for parties to clearly state the circumstances that the landlord may use the security deposit to avoid a costly dispute.
It is common for lease agreements to allow the landlord to set off against the security deposit if the tenant is late in rent or if the landlord has to incur costs to reinstate the premises at the end of the lease. The lease agreement may also allow the landlord to use the tenant’s security deposit to pay utilities or maintenance service charges if the tenant is in default.
In most cases, the landlord is not required to give the tenant notice that he would be using the security deposit since the tenant would have already defaulted. However, it is good practice for the landlord to inform the tenant that using the security deposit is without prejudice to the landlord’s rights against the tenant, so that the landlord preserves his right to charge late payment interest or to sue the tenant later.
Most lease agreements also require the tenant to top up the security deposit if the landlord has to use the security deposit. As such, tenants should be careful to rely on the security deposit as a buffer to pay rent late as the tenant will have to make up for the shortfall.
What can a tenant do to receive his security deposit back in full?
The landlord may only use the security deposit in accordance with the terms of the lease. Thus, the first step for a tenant to recover his security deposit is to read the lease agreement and understand his obligations. Is he required to keep the property in good and tenantable repair? Does he have to reinstate and return the premises in the original condition that it was handed over to him?
The second step for the tenant is to go through the handover and inventory list with the landlord or the landlord’s agent when taking over the property. What is the condition of the property when it was handed over to the tenant? What are the fixtures and fittings and what is their condition? Are there any obvious defects?
The third step is to highlight any defects in the property during the course of the lease to the landlord that may be the landlord’s or another party’s obligation to fix. For example, if there are any leaking pipes, faulty electrical fittings, mold or damage caused by neighbours.
Finally, the tenant should arrange to inspect the premise with the landlord before the expiry of the lease. The tenant should note down any defects in the property that he is obliged to repair and carry out these repairs. This will facilitate handing over the property to the landlord at the expiry of the lease.
At the expiry of the lease, the tenant should confirm with the landlord in writing that (i) the property is returned in a satisfactory manner and (ii) there are no outstanding debts due to the landlord, before giving back the keys.
Taking these steps will help a tenant recover his security deposit at the end of the lease.
Frequently Asked Questions regarding security deposits
Question #1: When is the landlord required to return the security deposit?
The landlord may hold on to the security deposit for such periods stated in the lease agreement. Where no provisions have been made in the lease agreement to withhold the security deposit, the landlord is obliged to return the security deposit at the end of the lease, less any deductions allowed in the lease agreement.
Question #2: Can I use my security deposit to set off against the final payment of rent?
The landlord is usually allowed to but not obliged to use the security deposit to set off against rent in the lease agreement. Lease agreements also usually allow the landlord to charge interest for late rent. This means that if a tenant does not pay rent on time in hopes that the landlord set off against the security deposit, the landlord can choose to wait and impose late payment interests.
For example, a lease agreement may allow the landlord to withhold the security deposit until fourteen days after the expiry of the lease. In such a circumstance, the landlord is entitled to accrue late interest payment until he is obliged to return the security deposit. At the end of the fourteen days, the landlord can then set off the rent due against the security deposit and still be entitled to claim fourteen days of late payment interests against the tenant.
Question #3: My landlord wants to use the security deposit to repair the property to its original condition but my lease agreement says that I may return the premises “fair wear and tear excepted”. What does this mean?
There is no precise definition of what “fair wear and tear” encompasses as it depends on the facts of the case. Generally, fair wear and tear refer to deterioration caused by ordinary and reasonable use or natural aging of the property. Alterations to the premises and its fixtures and fittings would not be considered fair wear and tear.
Some commercial or retail leases require the tenant to return the premises in a bare condition and may stipulate the number of coats of paint required. These conditions are usually set out in a fitting out manual, which the tenant should read carefully.
Question #4: What can a tenant do to recover his security deposit?
A tenant may apply to the Small Claims Tribunal to recover his security deposit if:
- the lease is a residential lease that does not exceed two years,
- the value of the claim is less than $10,000 and
- the claim is made within one year from when the security deposit ought to be returned.
In most other cases, the tenant will have to apply to litigate to recover his security deposit. It is also important to note that the lease agreements usually restrict the mode of dispute resolution. In such a case, the tenant should follow the dispute resolution process set out in the agreement.
While there are merits to negotiating an amicable resolution, if in doubt, parties should seek legal advice to ascertain their rights.
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The information in this article is for general information purposes only and is not intended to be and does not constitute or substitute legal advice. You should not act on any information in the article without first seeking legal counsel.
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This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.