Article 9 and the Characterization and Treatment of Tenant Security Deposits
32 Pages Posted: 28 Jan 2016
Date Written: 2013
Each day, thousands of lessees enter into contracts under which they lease either real or personal property. Under the majority of these contracts, the lessee agrees to pay (and does pay) a "security deposit" to the lessor. The lessor typically agrees to refund the deposit at the conclusion of the lease term if the lessee fully performs its obligations under the lease contract. Is Article 9 relevant to this transaction? Has the lessor taken a "security interest" in the lessee's property to secure the lessee's obligations under the lease contract?
In Part I, we highlight two opinions representative of the majority of case decisions that have treated lessee security deposits as a "debt." In Part II, we briefly explore the extent to which Article 9's existing provisions appropriately address tenant security deposits, focusing particularly upon some potentially troubling differences that may follow if a security deposit is not made with property of the debtor (such as cash or a check) but is instead made with a credit card or similar payment mechanism. Part III argues that instead of attempting to modify Article 9 to more aptly govern tenant security deposits, the Uniform Law Commission should incorporate explicit provisions for the characterization and handling of tenant security deposits into the revised URLTA provisions that acknowledge the security deposit as a form of secured transaction, but that address the expectations of residential landlords and tenants more appropriately than the existing provisions of Article 9. Part III concludes with statutory language proposed for inclusion within the revised URLTA.
JEL Classification: K11, K12
Suggested Citation: Suggested Citation