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Application Fees Versus Security Deposits: What’s the difference, and what laws apply to Baltimore rental properties

A fee is a fee…is a fee – right? No, it isn’t – and any professional, engaged in property management in Baltimore city for any degree of time, will tell you that! However, because there are some similarities between the two – they’re both paid by tenants to landlords - newbie landlord, or someone just starting a career in property management, might have some misgivings about them. Another cause for confusion and misgivings, is the fact that there are so many rules and regulations surrounding each, and running afoul of those mandates may be costly for property owners.

In this post, we dissect each of these two payments, and lay down the Do’s and Don’ts surrounding each of them. We also highlight best practices that property owners, or their designated property management agents, should consider.

Under existing state of Maryland’s rental/leasing property laws, you – the landlord or rental property owner, and by extension, any Baltimore city property management company working on your behalf - can charge prospective tenants an Application Fee. Here are some facts about such fees that property owners must keep in mind:

• You may collect that fee at the time when the prospective tenant applies to rent a unit in your property – even prior to the applicant signing a lease
• The fee must be $25 or less (more on this shortly!) and, unlike the refundable Security Deposit fee, is non-refundable
• Landlords must only use that fee in the interest of processing the application. For instance, you may apply it to the cost of performing a credit check, or towards associated administration costs
• If you rent more than five units in a single location, you owe it to the prospective tenant to explain what rights they have under the terms of collecting such fee
• If you withhold more than $25, the applicant has the right to request that you explain what you used that money for
• Under laws governing property management in Baltimore city, applicants have the right to a refund of any excess amounts (over $25) that is not used towards processing his/her application
• Such excess refund must take place within 15-days of the tenant moving in; or no more than 15-days from you notifying a tenant that the rental will not take place

Prior to processing an application, landlords, and/or property managers acting on their behalf, should not request for any money from prospective tenants to hold an apartment. Such sums are typically construed as Security Deposits, and may only be requested upon successful processing of an application.

BEST PRACTICE: When issuing a receipt for the Application Fee to the prospective tenant, it’s always a good idea to clearly state what that money is for, and that only any amount in excess of $25 is refundable.

Security Deposits

Another financial area, that many newbie landlords or property managers struggle with, relates to Security Deposits. From reading the section about Application Fees, it should have become amply clear that a Security Deposit is refundable, unlike an Application Fee. However, there are other rules, regulations and legal conventions surrounding such deposits, that rental property owners must be aware of:

• You charge a Security Deposit as a kind of “insurance” against certain possible events that a tenant may be liable for. These include damages to property, failure to pay rent, or any expenses you incur as a result of the tenants’ breach of leasing covenants
• Make sure that you, or your designated Baltimore city property management company, do not charge more than two months’ rent as Security Deposit
• Any overcharging of such deposits may be costly for you. If you are found in contravention of this law, the courts may award renters/tenants three times the excess amount as compensation, plus any reasonable amount as legal fees
• You must ensure that your tenant receives a written receipt for the money paid as deposit. The receipt may either be a separate document, or it may be included as part of the lease agreement. Whichever format you choose, it must state clearly how much you’ve charged, and that the amount so charged represents an adjustable/refundable deposit
• If you, or your agents, fail to provide a receipt – in whichever format – the law applies a $25 penalty for such non-issuance
• The Security Deposit receipt, or lease terms governing it, must acknowledge that landlords/agents will provide, upon request by the tenant/renter, a list of existing damages to the rental property within 15-days of occupancy. The law may impose a fine, equivalent to three times the deposit amount, less any unpaid rent or costs for damages, for failing to comply with this request
• Under the laws governing property management in Baltimore city, the money received as Security Deposit must be placed in an escrow account created specifically for this purpose. This money must not be used for any other purpose, except that defined by appropriate laws governing such amounts
• You must return Deposits, less any permissible adjustments, within 45 days of a tenancy ending. Deposits of $50 or more must be returned with simple interest calculated from the date of receipt of the deposit.

When calculating interest payable, be mindful that there are several milestone dates, and associated legally-binding interest rates, to consider. These include prior to October 1, 2004 (4%), prior to January 1, 2015 (3%), on or after Jan 1, 2015 (1.5%). It may also help to understand the background and methodology associated with these calculations.

BEST PRACTICE: When preparing to return Security deposits, it’s best to use the Maryland Department of Housing and Community Development’s Rental Security Deposit Calculator. This handy tool is only applicable for Security Deposits held on or after January 1, 2015.

Do Your Own Diligence

The opinions expressed here are based on current Maryland State laws, and rules and regulations adopted by Baltimore City Council – which largely endorse State mandates around rental properties. However, these laws may change periodically. For instance, City Council enacted some provisions during the COVID-19 crisis, which were temporary in nature. Some of these have since been rescinded. Make sure you frequently check with official resources about the most current legislation.