Can a Landlord Keep your Earnest Money?

When you look at my consistency in posting blog entries, you pretty much can see the consistency of my life as late.  I was doing really well with regular blog posts, 2 to 3 per week.  Then here goes another stretch for nearly a month without one.

 

A lot has been going on the World ‘o Rent, both professionally and personally.  But, like a lot of other people out there, I am fighting the battles one day at a time.  Every evening, when the day comes to an end, it is a small victory and every morning when the alarm clock goes off, a new battle begins.

 

There of course has been excitement.  A few weeks ago I did an interview with the Wausau Daily Herald where I played the roll of “political pundit” as it related to theWausaumayor’s race.  I talked about the strengths and weaknesses of Mayor Tipple in his bid for re-election, and also discussed other likely candidates and then brought up some names we might also see as the race gets closer.  Being a regular in City Hall, I was worried a little bit about this because everyone likes reading about their strengths, but some people really don’t take criticism of their weaknesses very well.  I did catch some flak from two people regarding the article that came out over a Sunday while I was inOklahoma.  Because of internet issues, I was able to get multiple emails demanding apologies, but it was not until a day or two later where I could read the article to see what exactly I was supposed to apologize for.  So… a good time there was had by all.

 

Shortly after said trip toOklahoma, Mrs. Rent’s mother fell and broke her hip.  Needless to say, an injury like this does cause a great deal of stress to a loving family.  It doesn’t help much that Mrs. Rent’s mom is a retired nurse.  And, it is no secret that the people who make the absolute worst patients tend to be doctors and nurses.  However, to add a level of drama, her mom is also pretty much the glue that holds that family together.

 

But, enough about the drama ala Rent.  I was emailed a question about an earnest money earlier this week.  A landlord takes a $100 earnest money with every application, if you don’t pay the $100, they don’t process the application.  An applicant was approved for an apartment, but never signed the lease.  Instead, the applicant applied for a number of places and signed a lease somewhere else.  However, now they want their $100 back.  The landlord has told the applicant because they were approved, they don’t get the money back, the application even says this clearly.  The applicant is telling the landlord that earnest money is refundable and if they don’t get it back, they are going to file a small claims action for return of the money – doubled.

 

Did the applicant automatically forfeit their earnest money when they signed the lease elsewhere after being approved?  The answer….. sort of.

 

Money that a landlord gets prior to entering into a rental agreement is “Earnest Money” by definition.  And the tenant is correct that “Earnest Money” is refundable.  Some landlords charge non-refundable application fees.  However, by legal definition, if you get the money before signing the lease, it is refundable “Earnest Money” no matter what the landlord tries to call it.  The only exception to this are funds collected for “Credit Check Fees”.  “Credit Check Fees” are NOT refundable, and I will talk about those in a little bit.

 

Since the Earnest Money is refundable, when must aWisconsinlandlord refund it?

 

If the landlord rejects the application, or refuses to rent to the applicant, the Earnest Money must be refunded to the applicant.  If the applicant withdraws their rental application BEFORE they are approved (or, more accurately stated, before they are notified that they are approved), they get their Earnest Money back.  Finally, if the landlord does not approve the application within three business days, it is assumed inWisconsinlaw that the application is denied and the earnest money must be returned.  (The 3 business day guideline can be extended out to 21 calendar days if agreed to in writing.)

 

Something important to note… although a landlord has 21 days to return the security deposit to a tenant, that same 21-day rule does NOT apply to Earnest Money.  If the applicant is eligible to have their earnest money refunded, it must be refunded by the end of the next business day.

 

In our situation though, the applicant withdrew their application AFTER acceptance, so none of the situations above apply.

 

If we read farther into the regulation that covers Earnest Moneys (ATCP 134.05), if the applicant does enter into a lease agreement, the Earnest Money is still refundable.  It can either be applied toward the applicant’s (now tenant’s) security deposit, to their rent, or in some cases get directly refunded back to them.  Again, in our situation, the applicant never signed the lease.

 

The law then goes on to discuss what happens when an applicant is approved, but does not enter the rental agreement.  In those situations, the Earnest Money is NOT automatically forfeited to the landlord.  However, the landlord can withhold from the Earnest Money “an amount sufficient to compensate the landlord for actual costs and damages incurred because of the prospective tenant’s failure to enter into a rental agreement.”  This can include new costs to re-lease the property, more showings, more advertising, etc.  This can also include rent that the landlord lost because they pulled the unit off the market and could have rented it to someone else.  Of course, in order to add lost rent to the list of damages, the landlord does need to make a reasonable effort to re-rent the property.

 

So, in going back to our original question, did the applicant automatically forfeit their $100 Earnest Money when they backed out of signing a lease after their application was approved?  No.. they did not.  However, if the landlord feels that they suffered $100 in damages (and to be honest, that is a fairly easy number to justify), they can withhold the earnest money in compensation of those damages. 

 

What about this non-refundable Credit Check Fee that I had mentioned?  Well, first let me say that when this law was added to the books in 1999, it became (in my personal opinion), one of the top three most useless laws written – ever.

 

This is how it works.  If a landlord wants to pass on the expense of doing a credit check on the applicant to the applicant, they can do so if they follow some (what appear to be) simple steps.

 

First of all, the landlord can only charge for the actual cost of the credit report, not to exceed $20.00.  So, if the credit report costs $10, the landlord can only charge $10.  If the credit report costs $30, the landlord can only charge $20.

 

The applicant has to be made aware of this charge before hand.  That way, if they don’t want to apply to avoid paying the fee, they can.  Also, the applicant can avoid paying the fee by providing the landlord with a copy of their credit report that is less than 30 days old.  In the event the landlord gets a copy of the credit report from the applicant, they can still run their own to verify the information is still accurate, the landlord cannot charge for it though.

 

So far, this law seems reasonable…. Why is this on Dr. Rent’s list of useless laws?  Well… another requirement the landlord must follow in order to be able to charge a tenant for their credit report is that the landlord must provide the tenant with a copy of the report.  Which you are probably thinking makes sense, after all, if they paid up to $20 for it, why shouldn’t they be able to have a copy of it?

 

Well…. Because that is not the way credit reports work.  Credit reports are not easy to get, you have to contract with a provider and those providers will have a ton of requirements that are established by laws that they have to follow before you are even allowed to be their customer.

 

One of these requirements is that you, as the party getting the credit report, agree to keep that information confidential and to not share the contents of the credit report with anyone else besides you…. INCLUDING THE PERSON YOU RAN THE REPORT ON!!!  That’s right, if you give me written permission to run a credit report on you, I cannot tell you what that report says.  If you have ever been turned down for credit, you don’t get a copy of your report, you get a letter saying which report they used and who you can contact to get a copy.  (Of course, you can go to the website www.annualcreditreport.com and run a credit report on yourself once a year from each of the “big 3” credit reporting agencies as part of the FACTA laws.)

 

Now you see why this law is useless.  I can only charge an applicant a Credit Check Fee if I am willing to violate my contract with my credit report provider, which could make it impossible for me to run credit reports in the future.  It is like passing a law that says that you can only drive a car if it is red… and then outlawing red paint.

 

So.. there is a short review of how earnest moneys work inWisconsin.  If a landlord is charging any type of application fee that is not refundable (with the exception of up to $20 for a Credit Check Fee), you can tell thatWisconsinlandlord – YOU CAN’T DO THAT!

 

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About drrent

Wausau, Wisconsin Landlord, past president of the Wisconsin Apartment Association, Host of the Dr Rent Radio Show on WNRB-LP, 93.3 FM, Wausau, WI
This entry was posted in ATCP 134, Credit Report, Double Damages, Earnest Money, FACTA, Questions and tagged , , . Bookmark the permalink.

3 Responses to Can a Landlord Keep your Earnest Money?

  1. Caroline Sinz says:

    In regards to earnest money refunds in the state of Pa would ATCP 134.05 still apply?

    Deputy

    • drrent says:

      Caroline,

      Thank you for the question.

      Each state has their own landlord-tenant laws, and each state handles things like earnest moneys, application fees, security deposits, eviction notices and procedures, etc. a little bit differently. In Wisconsin, landlord tenant laws are covered under WI SS 704 and ATCP 134. Any blog posts I do on those items are specfic to Wisconson only. So, no, ATCP 134.05 wouuld NOT apply to Pennsylvania.

      There are a few laws that are federal in nature (such as fair housing laws on 7 of the protected classes and lead based paint laws to name a few). When I discuss federal laws, those laws do apply to all states.

  2. aresch says:

    What if you give them earnest money and apply for an apartment being told you are one of 3 applicants applying for an apartment. You never hear you got it so assume you didnt get. SO a week later you call them asking for your earnest money check back they say you were approved little to your knowledge as you never heard from them. Now they want you to sign a withdrawal for approved application even though you didnt know you were approved. They say that you have to sign this so they can rent it to someone else. Does this sound suspicious to you? Would you be concerned about litigation later?? The earnest money was 540

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