Pennsylvania Expands Definition of Security Deposit Under the Landlord and Tenant Act | Practical Law

Pennsylvania Expands Definition of Security Deposit Under the Landlord and Tenant Act | Practical Law

The Superior Court of Pennsylvania recently interpreted the definition of security deposits in connection with residential leases to include instances where the landlord collects the last month's rent in advance.

Pennsylvania Expands Definition of Security Deposit Under the Landlord and Tenant Act

by Practical Law Real Estate
Published on 08 Jan 2018Pennsylvania
The Superior Court of Pennsylvania recently interpreted the definition of security deposits in connection with residential leases to include instances where the landlord collects the last month's rent in advance.
Section 250.511a(a) of the Pennsylvania Landlord and Tenant Act of 1951 (LTA) (68 P.S. §§ 250.101 to 250.602) states that a landlord may not require more than two months' rent to be deposited in escrow for the payment of damages to a leasehold premises and/or rent in default during the first year of any lease.
On November 15, 2017, in E.S. Management v. Gao, the Superior Court of Pennsylvania held that, under the LTA, if a landlord requires a tenant to pay last month's rent in advance, then this amount will also be considered part of the security deposit and treated the same way ().

Background

In anticipation of entering into a lease, several international students living in China submitted a deposit of $5,785 consisting of two months' rent of $3,990 ($1,995 per month), plus the last month's rent of $1,795, which had been discounted by $200.
The management company told the students that the deposit would prevent the apartment from being rented to other potential tenants, but failed to tell the students until after they had tendered the deposit that it would be forfeited if the students did not ultimately lease the apartment after reviewing the lease. Additionally, the management company only provided the students two days to review and execute the lease, which contained provisions advising the students to seek review by an attorney. The two-day review period was unilaterally imposed by the management company.
Following a disagreement about the payment of utilities, the students decided against renting the apartment after the two-day review period expired. The management company refused to refund the security deposit even though no lease was signed.
The students filed suit to recover the security deposit, but the magisterial district court ruled in favor of the management company. The students appealed, alleging violations of the LTA and the Unfair Trade Practice and Consumer Protection Law (UTPCPL).
The court found that the management company violated the LTA by requiring a sum in excess of two month's rent as a security deposit (see Practice Note, Understanding Security Deposits (PA): Residential Real Estate Security Deposits).
The court also found that the management company violated the UTPCPL because:
  • It only informed the students after the deposit had been tendered that the deposit could be forfeited if the students chose not to lease the apartment.
  • It only allowed the students two days to review and execute the lease.
The management company argued on appeal to the Superior Court that:
  • No lease existed between the parties and there was no landlord-tenant relationship, so the case was not governed by the LTA or UTPCPL.
  • The last month's rent was a prepayment and was not part of the security deposit.
  • The UTPCPL does not require longer than a two-day review period for residential leases.

Outcome

The Superior Court ruled in favor of the students, holding that the prepayment of the last month's rent was part of the security deposit, and that the cumulative amount violated the maximum amount of a security deposit allowed under the LTA.
The court explained that because the deposit was to secure the execution of a rental agreement, the LTA applied and required that the funds be deposited into an escrow account. The management company testified at trial that the $1,795 was the for last month's rent, which meant it was not owed to the management company until 12 months in the future, and only if the students failed to pay the last month's rent. This was in direct violation of the LTA, which only allows two month's rent to be collected as security during the first year of a lease.
The court also found that the violation of the LTA triggered a violation of the UTPCPL, which prohibits unfair or deceptive acts or practices, including engaging in any other fraudulent or deceptive conduct that creates a likelihood of confusion or of misunderstanding, because:
  • The lease stated that the security deposit was $1,995.
  • The management company stated it required a double security deposit because the international students did not have US social security numbers.
  • The students were likely to be deceived because they did not have a strong understanding of the English language.
  • The management company only allowed two days for international students to read a complicated 15-page lease and to have it reviewed by an attorney.

Practical Implications

This case reiterates that Pennsylvania residential landlords and their management companies must strictly comply with the LTA and its provisions regarding security deposits. The court's decision could also be interpreted to include as a security deposit other funds commonly collected in advance to secure a lease, such as pet deposits. Counsel representing residential landlords in Pennsylvania should review their clients' current policies and requirements for security deposits and other payments, and determine if changes should be made to ensure that their clients are not violating the LTA or engaging in practices that may be deemed unfair and deceptive under the UTPCPL.
For more information on residential leasing and security deposits in Pennsylvania, see: