Don’t you charge tenants interest on their security deposit? You’re taking a risk.
Regarding the landlord’s obligation to return the collected deposit to the tenants at the end, including interest, it should be said that if we mistakenly use the popular formulation in the lease agreement that the deposit will be returned to the tenants at the end of the lease and will not bear interest or will bear interest at 0.1%, then we risk that such an arrangement will be challenged by our tenant as invalid.
Such a cunning tenant, for example, after 5 years of lease, will change his mind and demand interest of around 7% from us, and we will have no choice but to pay it. How much is 7% of such a fairly common deposit of around 40,000 crowns?
7% is 2,800 CZK per year, so after 5 years you could return 56,102 CZK to the tenant with compound interest, which is 16,102 CZK more than you collected from him at the beginning of the lease.
Why is this so and can it be avoided?
This is because, by definition, a deposit given to the landlord is considered a loan. The landlord can do with the deposit as he or she sees fit and can use it as an asset and invest it wherever he or she wants. However, he or she must pay interest for this benevolence. However, if you do not agree on the amount of interest directly in the contract for a “loan” (rental agreement), then the following provision applies:
§ 1802 “If interest is to be paid and its amount is not agreed upon, the debtor shall pay interest at the amount determined by law. If interest is not determined in this way, the debtor shall pay the usual interest required for loans provided by banks in the debtor’s place of residence or registered office at the time of conclusion of the contract.”
Since no regulation regulates the interest on the deposit, the current interest rate on loans provided by banks applies. This can be, for example, the aforementioned 7%, but it can also be higher, for example, unsecured consumer loans can have 15%, mortgages can have 6% in 2023, etc.
How to defend against this?
We have the option of agreeing on the interest rate directly in the contract, so that later, for example after 5 years, the tenant cannot come out and claim, for example, the aforementioned 7%. But there is one catch.
However, there is one catch to the interest rate agreement in the contract:
I generally recommend giving the deposit with an interest rate of at least 1%, which is, in my opinion, the lowest defensible interest rate. If the agreed interest rate is lower or zero, the owner exposes himself to the future threat that if he brings an excavator into the apartment and gets into a dispute with him (mostly Czechs rather than foreigners), this person may declare such an agreement in the contract invalid, see: the provision of Section 2235, paragraph 1 of the Civil Code , which wisely states that provisions in the lease agreement that would curtail the tenant’s rights are not taken into account.
And subsequently, such a tenant can also demand in court that the deposit be returned to him with interest corresponding to the statutory rate, i.e. “the usual interest required for loans provided by banks in the place of residence or registered office of the debtor at the time of conclusion of the contract” . See above. So we are back where we were.
§ 2235
(1) If the lease agreement obliges the landlord to transfer to the tenant the apartment or house that is the subject of the lease to meet the housing needs of the tenant and, where applicable, the members of his household, arrangements that reduce the tenant’s rights under the provisions of this subsection shall not be taken into account.
The amount of interest can therefore be set by agreement in the lease agreement, but it must be at a reasonable minimum level, otherwise it would be a reduction of the tenant’s rights, which the Civil Code does not allow. Such an agreement would then be disregarded.
The solution is: explicitly set the interest rate in the contract, but it should be reasonable, i.e. not 0.1 or 0.01% interest as is common practice. I recommend at least 1%.
Why 1%?
In my opinion, the justified interest could correspond to the interest rate on current or savings accounts. The justification is the logical consideration that this is exactly where the owner usually places the deposit and it will therefore be valued at this normal interest.
According to a different logic and closer to the interpretation of the law, when the amount of interest is compared and depends on the amount of interest for loans provided by the bank. Thus, the amount of interest at the bank always depends on several factors, on the duration of the loan, and on the creditworthiness of the loan applicant. If we take into account that a regular lease will last in units of years, we will therefore base this allegory on short-term loans and can compare, for example, with the interest on bonds or mortgages with short-term fixation. However, the final answer to this question will only be provided by case law. When someone settles a case with someone somewhere, the outcome of the court will tell us how this issue will be assessed in the future.
Oh, and finally, one more piece of information, a deposit is no longer called a deposit, the Civil Code does not know such a word. Today, a deposit is called a “security deposit”. Be careful, security is not a principal, people often confuse that. The principal is the unpaid net amount of the loan, to which interest and fees are added. Security is what was previously called a “deposit”.
Have a good time.
WHY WORK WITH ME ON RENTALS?
In addition to knowing where and how to find the best tenants, I also know many of the typically overlooked pitfalls of this issue. Are you having trouble renting? I know where the problem will be. The problem does not always have to be the price. Get in touch.
Bc. Jan Holický, MBA.
DON’T HAVE TIME TO WORRY ABOUT FINDING SUITABLE TENANTS?
In addition to knowing where and how to find the best tenants, I also know many of the typically neglected pitfalls of this issue.
Do you want someone who will last a long time in the lease, with whom you will not have to deal with operational problems, someone who will pay on time and regularly, will not damage the apartment or its equipment, will have liability insurance for damage, there will be decent communication with them and will follow the basic rules of social coexistence?
Get in touch with me. This is my specialization and I have a system for how to select such tenants.