As online banking and internet-based banks become more popular and convenient, I’ve found many Massachusetts landlords utilizing them to hold security deposits for the duration of a tenancy or lease period. Of course this is a practical solution to managing these kinds of funds. A landlord can view and receive statements electronically, manage several accounts with a click of the mouse and calculate annual interest payments to tenants without having to step foot in a brick and mortar bank to have a passbook balance updated. But, Massachusetts law sets some very firm restrictions on security deposit escrowing that pretty much prevents the practice of placing these funds in internet or online banks.
In addition to a laundry list of other prerequisites, the Massachusetts Security Deposit Law requires that security deposits be placed “in a separate, interest-bearing account in a bank, located within the commonwealth.” Presumably a landlord could be sitting in front of their computer in Massachusetts and transfer the security deposit funds into an online bank account. But, if the online bank isn’t established in Massachusetts, then such a deposit would violate the Security Deposit Law. And, simply having a branch in Massachusetts probably isn’t enough to qualify a bank as being “located within the commonwealth” for purposes of the statue. Additionally, the act of physically depositing funds in a Massachusetts branch of an out-of-state bank may not be enough to satisfy the law’s requirements. The Massachusetts Appeals Court touched on this possibility back in 2007 in a case where a landlord deposited funds in a New Hampshire branch of Citizens Bank – a bank with branches located throughout New England.
Failure to properly deposit a security deposit in accordance with the Security Deposit Law has serious ramifications. First, a landlord forfeits their right to retain any portion of the Security Deposit – even if there is outstanding rent or property damage. In fact, as soon as the violation is discovered, even during the tenancy, the tenant can demand the return of the security deposit. Second, if a landlord attempts to retain the security deposit or any portion of it after thirty days have passed since the termination of the tenancy then treble damages apply - that’s a penalty of up to three times the amount of the security deposit, plus the return of the retained amount to the tenant and attorney’s fees and costs.
There remains really only one way to comply with the bank location dilemma – deposit the security deposit in a true Massachusetts bank – one that is not only located in Massachusetts, but is established under the laws of Massachusetts. But, make sure the deposit is put into a landlord/tenant trust account and not just any old savings account. And, never commingle a tenant’s security deposit with the landlord’s other funds. Remember, a security deposit remains the property of the tenant throughout the tenancy or lease period and only becomes the property of the landlord under limited circumstances – those of which will surely be the topic of a future blog post!
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