Q&A: What is difference between security deposit and holding deposit?

Question: After months of looking for an apartment close to my place of employment, I found a great place. I signed a month-to-month rental agreement and paid my first month’s rent as well as what I thought was a security deposit. The manager promised to have the apartment ready in two weeks but constantly came up with excuses about why the property was not ready as promised.

First, there was a week’s delay because the contractors were slow in completing some remodeling work. Second, I was informed that there would be another week’s delay because an adjoining apartment was being treated for bedbugs and they needed to treat my apartment as a precaution.

Finally, I was asked if I would mind moving into a smaller apartment than the one specified in my rental agreement. That was the last straw.

I signed a lease with a different apartment complex and requested the return of my first month’s rent and security deposit. My rent was returned, but management said my deposit was a holding deposit rather than a security deposit and that it would not be returned because I failed to move in while they held the rental unit for me. What is a holding deposit, and are they allowed to do this?

Answer: Holding deposits are often the cause of much grief and confusion. A holding deposit is a specialized type of deposit that a landlord requests to keep the rental unit reserved until the tenant moves in and pays the agreed-upon rent and security deposit. A knowledgeable landlord will execute a separate written holding deposit agreement that specifies the purpose of the deposit as well as how the deposit will be treated when the prospective tenant moves — or fails to move — in.

Unlike a security deposit, a holding deposit can be kept in whole or part if the landlord keeps the apartment open and the tenant fails to move in as agreed upon. But, just as with a security deposit, the landlord is required to show incurred damages for holding the rental unit. He cannot automatically keep the holding deposit.

Your case is more complicated than the standard scenario because you signed a rental agreement, paid first month’s rent and paid the deposit at the same time. This sounds like a regular security deposit, but we urge you to read the provisions in the agreement you signed to see if it is described as a holding deposit or as a security deposit.

If it is in fact a security deposit rather than a holding deposit, damages can be deducted only for unpaid rent in your case. Of course you have an argument that the landlord breached the contract by repeatedly failing to deliver the promised apartment, thus obviating the unpaid rent argument.

Consider contacting a local fair housing or mediation program, or Project Sentinel at (888) 324-7468, or visit our website at https://www.housing.org.

Van Deursen is director of Dispute Resolution Programs for Project Sentinel, a Bay Area nonprofit. Send questions to info@housing.org.