What are a New York landlord's security deposit obligations?

This page explains New York law on security deposits held by landlords: the trust rules in General Obligations Law 7-103 that apply to residential and commercial premises alike, the residential protections in sections 7-107 (rent-stabilized units) and 7-108 (other dwelling units), and the duties that come with selling a building. KOR Law LLP's landlord representation practice represents commercial and residential property owners in lease enforcement and in disputes over rent and possession, and deposit handling is often part of those disputes.

What rules apply to every deposit?

General Obligations Law 7-103 covers money deposited or advanced on a contract or license for the use or rental of real property, as security or to be applied to payments. That money "shall continue to be the money of the person making such deposit," must be held in trust, and "shall not be mingled with the personal moneys or become an asset of the person receiving the same" (General Obligations Law 7-103(1)). The rule applies to stores and offices as well as apartments.

• Bank notice. When the landlord deposits the money in a bank, it must notify each tenant in writing of the bank's name and address and the amount, and the bank must have a place of business in New York (7-103(2)).
• Interest. If the account earns interest, the landlord may keep 1% a year as administration expenses; the rest belongs to the tenant, held in trust or paid annually (7-103(2)).
• Six or more units. For rental property with six or more family dwelling units, the deposit must be placed in an interest-bearing account in a New York bank at the prevailing rate (7-103(2-a)).
• No waivers. A lease provision waiving these rules "is absolutely void" (7-103(3)).

What extra rules apply to residential units?

For dwelling units other than rent-controlled and certain senior housing, General Obligations Law 7-108(1-a) adds detailed duties; rent-stabilized units get parallel protections in section 7-107.

• One-month cap. "No deposit or advance shall exceed the amount of one month's rent," with narrow exceptions for registered seasonal units and owner-occupied co-op apartments (7-108(1-a)(a); 7-107(2)).
• Permitted deductions only. The landlord may keep only reasonable, itemized costs for unpaid rent, damage beyond normal wear and tear, unpaid utility charges payable to the landlord under the lease, and moving and storing the tenant's belongings; never ordinary wear and tear or a prior tenant's damage (7-108(1-a)(b)).
• Move-in inspection. After signing and before occupancy, the landlord must offer an inspection; if the tenant asks, both sign a written agreement noting existing defects, and the landlord cannot later charge for those conditions (7-108(1-a)(c)).
• Pre-move-out inspection. Within a reasonable time after either side gives notice of ending the tenancy, the landlord must tell the tenant in writing of the right to request an inspection and to attend. If requested, it happens one to two weeks before the end of the tenancy, on 48 hours' written notice, followed by an itemized statement of proposed deductions that the tenant may cure (7-108(1-a)(d)).
• Fourteen days. Within 14 days after the tenant vacates, the landlord must give an itemized statement of anything kept and return the rest; missing that deadline forfeits "any right to retain any portion of the deposit" (7-108(1-a)(e)).
• Burden and penalties. In a dispute, the landlord bears the burden of proving the deductions were reasonable; a violator owes actual damages, and a willful violator up to twice the deposit as punitive damages (7-108(1-a)(f), (g)).

Separately, a residential landlord may not charge application or other move-in fees beyond actual background and credit check costs, capped at $20 and waived if the applicant provides a check from the past 30 days (Real Property Law 238-a(1)).

What happens to deposits when the building is sold?

On a sale or lease assignment, or when a foreclosure receiver qualifies or a referee conveys the property, the landlord must turn the deposits over to the buyer, assignee, purchaser or receiver at delivery of the deed or within five days, and notify each tenant by registered or certified mail of the transfer and the new holder's name and address (General Obligations Law 7-105(1)). A landlord that does so is relieved of liability, and the transferee becomes responsible for returning the deposit (7-105(2)). Failing to comply "is a misdemeanor" (7-105(3)).

For residential units, a buyer is also liable for deposits it has actual knowledge of even if they were not turned over. Knowledge is presumed where the deposit was in a New York bank in the six months before closing, was acknowledged in a lease in effect at closing, or is proved by the tenant's documents. Where there is no record, the buyer must notify the tenant within 30 days after closing and may demand an escrow of one month's rent from the seller (7-108(2)). If a property is in foreclosure, a receiver's liability is limited to deposits actually turned over and excess operating income (7-108(2)(e)); receivers are discussed in whether a lender can take over a building's rents with a receiver.

How should a landlord handle a deposit, step by step?

1. At signing. Collect no more than one month's rent for residential units; give written notice of the bank and amount (7-103(2); 7-108(1-a)(a)).
2. Before move-in. Offer the inspection and sign a condition agreement if requested (7-108(1-a)(c)).
3. During the tenancy. Keep the deposit separate, in an interest-bearing account where required (7-103).
4. When the tenancy is ending. Notify the tenant of the right to an inspection, hold it if requested, and send the proposed deductions (7-108(1-a)(d)).
5. Within 14 days after move-out. Send the itemized statement and the balance (7-108(1-a)(e)).
6. On a sale. Transfer the deposits and notify tenants by registered or certified mail within five days (7-105).

What changes the answer?

• Commercial or residential. Sections 7-107 and 7-108 apply to dwelling units; 7-103 and 7-105 apply to all deposits.
• Rent regulation. Rent-stabilized units follow 7-107; rent-controlled units are excluded from 7-108(1-a).
• Building size. Six or more units triggers the interest-bearing account rule (7-103(2-a)).
• Co-ops and seasonal units. Owner-occupied co-op apartments and registered seasonal units have different caps (7-108(1-a)(a), (4) to (6)).
• Willfulness. Punitive damages of up to twice the deposit require a willful violation (7-108(1-a)(g)).
• The lease. Commercial leases set the amount and refund terms, but cannot waive the trust rules (7-103(3)).

For example: a tenant who leaves owing a month's rent

Common mistakes

• Commingling. Depositing tenants' money in an operating account violates the trust rule (7-103(1)).
• Missing the 14-day deadline. It forfeits the right to keep anything (7-108(1-a)(e)).
• Charging for normal wear and tear. It is not a permitted deduction (7-108(1-a)(b)).
• Collecting "last month's rent" plus a deposit. The residential cap applies to any "deposit or advance" (7-108(1-a)(a)), and other up-front payments are barred except background and credit check costs (Real Property Law 238-a(1)).
• Selling without transferring deposits. It is a misdemeanor and can leave the buyer liable too (7-105; 7-108(2)).
• Lease clauses waiving the rules. They are void (7-103(3); 7-108(3)).

What to do this week

1. Confirm each deposit is in a separate New York bank account, interest-bearing where required.
2. Send any missing bank notices to tenants.
3. Check residential deposits against the one-month cap.
4. Add move-in and move-out inspection steps to your leasing checklist.
5. Calendar the 14-day deadline for every upcoming move-out.
6. Before any sale, prepare a deposit schedule and transfer plan.

If a tenant is behind on rent rather than leaving, see how a commercial non-payment case works in New York City.

Frequently asked questions

Can the deposit be used to pay the last month's rent?

Deductions for unpaid rent are permitted when the tenant vacates (7-108(1-a)(b)). Whether a tenant may direct that the deposit be applied earlier depends on the lease, and a landlord should still send the itemized statement within 14 days.

Can a commercial landlord require a larger deposit?

The one-month cap applies to dwelling units. A commercial deposit is set by the lease, but must still be held in trust and not commingled (7-103).

Can I deduct legal fees from a residential deposit?

The permitted deductions are listed in 7-108(1-a)(b), and legal fees are not among them. Fee recovery is covered in whether a New York landlord can recover attorney's fees from a tenant.

Does the deposit protect against a holdover tenant?

It can cover unpaid rent after the tenant leaves, but not possession. Ending a tenancy starts with the notice a New York landlord must give before a holdover case.

What if the tenant abandoned belongings?

Reasonable costs of moving and storing the tenant's belongings are a permitted deduction (7-108(1-a)(b)). After an eviction, the officer's process governs removal; see what happens after a New York landlord wins.

Does a guaranty replace a deposit?

They are different protections. A guaranty is a separate promise by another person, and its terms decide what it covers; guarantor defenses are discussed in what defenses a personal guarantor has when a New York lender sues.