Chapter 8 - § 8.2 • SECURITY DEPOSITS

• Jurisdiction: Colorado

§ 8.2 • SECURITY DEPOSITS

A "security deposit" is an amount of money deposited with the landlord or some third party to provide a source of funds for the payment of rent or the performance of other obligations of the tenant if the tenant defaults. Security deposits are commonplace in all kinds of leases, except perhaps ground leases. The amount of the security deposit varies tremendously as it is based on the landlord's assessment of the risk being taken, but one month's rent is quite common.

§ 8.2.1—Landlord and Tenant Interests

The landlord wants to have the protection of the security deposit throughout the term. The tenant wants to tie up the least amount of money for the least amount of time. The tenant also wants to be sure that the security deposit is only used to cure real defaults and is timely returned at the end of the lease.

§ 8.2.2—Security Deposit Negotiating Issues

The amount of the security deposit is usually the main issue, though many "credit-tenants" and national companies refuse to pay any security deposit. The security deposit under a lease may raise several other negotiating issues.

How the Security Deposit is Held

One lease negotiation issue concerns the way the security deposit is held. Typically, the landlord holds the security deposit. It is very unusual for a lease to provide that a third party must hold the tenant security deposit, but a tenant with a serious concern about the landlord's financial condition or honesty, and sufficient bargaining power, might seek to have a third party hold the security deposit in an escrow or trust account.

Additionally, most landlords want to commingle the security deposit with their own funds. Most tenants, however, want the security deposit held in a separate account. The landlord often resists this request, either because a separate account is an administrative burden or because the landlord intends to use the money while it is on deposit. If the security deposit is to be held in a separate account, the tenant might want to have the account treated as trust funds or escrowed funds, insulated from claims of the landlord's creditors, especially the landlord's bank. This is because the landlord's bank can offset deposit accounts against the landlord's obligations to the bank unless they are designated as a trust or other "special deposit," where they impliedly remain the property of the tenant.¹ Insulating a security deposit from the landlord's creditors may take more than words in the lease, however. Having the security deposit held in a separate account and denominated trust funds or escrowed funds in the lease is certainly helpful. If the security deposit is to be held in a separate account, it is probably to the advantage of both the landlord and the tenant to specify the name of the financial institution, or the kind of financial institution, where the security deposit will be held. The tenant will want the lease to state that its deposit will be held in a financial institution in which deposits are federally insured. A tenant with concerns...