Relates to tenant security deposit accounts and administrative expenses to which a person may be entitled

Existing law

General Obligations Law § 7-103(2) currently authorizes landlords to retain the first 1% of any interest earned on a tenant's security deposit.

Justification

Prior to 1970, there was no requirement that tenants be paid interest on the money held by landlords as security deposits for their apartments. Instead, landlords were free to place those funds in non-interest bearing accounts, and to simply return the security deposit to the tenant at the end of the term of the lease.

The Legislature sought to cure this inequity through the passage of Chapter 1009 of the Laws of 1970, which amended General Obligations Law § 7-103 in two ways. First, the law provided that landlords in buildings with six or more dwelling units must place security deposits in accounts earning the prevailing rate of interest for similar accounts in the area. Second, the law authorized the landlords to retain a fee of 1% of the amount deposited to cover any expenses that the landlord incurred in administering such accounts. Thus, for the first time tenants were assured that they would receive interest payments on the security deposits that they provided to their landlords, and the law also sought to compensate landlords for the administrative costs that they were expected to incur.

Unfortunately, the effectiveness of this law has been greatly diminished by the manner in which Chapter 1009 was drafted and has been implemented, together with other events that have occurred during the past 30 years.

First, when the amendments to General Obligations Law § 7-103 were enacted in 1970, interest rates on basic savings accounts were about 6%. As a result, at the time it appeared reasonable to permit landlords to retain a 1% administrative fee, because the tenant would still receive most of the interest earned. For example, a $1000 security deposit would earn $60 per year, with $50 (83% of the total interest) being paid to the tenant and $10 (17% of the total interest) being paid to the landlord.

Over the years, however, there has been a significant drop in interest rates on savings accounts, and under the current statutory scheme tenants have borne all the financial consequences of that decrease. Indeed, some banks are now paying only 1.1% interest on tenant security deposits, but the landlord is still getting a full 1% fee, and the tenant is left with only one-tenth of 1%. For example, the same $1000 security deposit that earned $60 per year in 1970 would earn only $11 per year now with the landlord still getting $10, and the tenant only $1. Thus, now the landlord is receiving 91% of the security deposit interest, and the tenant is receiving only 9%. General Obligations Law § 7-103 specifically provides that rental security deposits "continue to be the money of the (tenant).....and shall be held in trust by the (landlord)" for the tenant, and thus it is particularly unfair that the landlord should receive most of the interest on such deposits.

A second significant flaw in General Obligations Law § 7-103 is that it provides an administrative fee to landlords, even if no administrative expenses are incurred. When Section 7-103 was amended in 1970, it was anticipated that landlords could be faced with significant costs in administering the accounts, and the Legislature therefore granted landlords a 1% fee to cover those expected costs. After that amendment was passed, however, banking institutions developed special "tenant security deposit accounts" through which the bank handles virtually all of the administrative functions for the landlords. Banks provide these services as an inducement to landlords, because tenant security deposits from the hundreds of thousands of tenants in New York State provide tens of millions of dollars in deposits to the banks. Section 7-103 continues to authorize the payment of a 1% administrative fee to landlords, even though they perform no administrative duties.

This bill addresses the inequities in the current law. Specifically, the bill amends General Obligations Law § 7-103(2) to provide that landlords shall receive an administrative fee equal to 20% of the interest earned on the tenant security accounts, up to a maximum of 1% of the amount on deposit.

Legislative history

S.5484 of 2007-08; S.2175 of 2005-06.

Fiscal implications

None.

Effective date

This bill shall take effect on the first day of January following enactment.