New Jersey Security Deposit Laws for Landlords

A New Jersey landlord can hold a security deposit of no more than one and a half months' rent, and that cap includes pet deposits and any prepaid last month's rent. You must keep the deposit in an interest-bearing account at a New Jersey institution, send the tenant written notices about it, pay the tenant all the interest it earns, and return it with an itemized list within 30 days after the lease ends. If a court finds you wrongfully kept any of it, it must award the tenant double the amount withheld.

How much you can collect

N.J.S.A. 46:8-21.2 caps the deposit at 1.5 times one month's rent. The Department of Community Affairs (DCA), the state agency that publishes landlord-tenant guidance, says three things count toward that cap:

• the security deposit itself;
• any pet deposit, so a $500 pet deposit is legal only if it fits under the cap with the regular deposit; and
• any prepaid rent held to secure future rent, including last month's rent, whatever you label it, based on New Jersey court decisions.

At lease signing, that means no more than the first month's rent plus the 1.5-month deposit, or 2.5 months' rent in all. On $2,000 rent, the most you can collect upfront is $5,000. Renting to pet owners covers pet policies and assistance animals, which are a separate question from pet deposits.

When the rent goes up, any extra deposit you collect in a year is limited to 10% of the deposit you already hold, and the total still cannot pass 1.5 months of the new rent.

Example: you hold a $2,000 deposit on $2,000 rent, and the rent rises to $2,100. The cap would allow $3,150, but the 10% rule limits this year's increase to $200, for a total of $2,200. If your town has rent control, the rent increase itself must also meet the local ordinance; see New Jersey rent control for landlords.

A lease clause in which the tenant waives any part of the Security Deposit Law is void.

Which rentals the law covers

The law applies to nearly all residential rentals, including apartments, houses, and mobile homes. The main exception is an owner-occupied building with no more than two rental units, such as a two- or three-family house where you live in one unit. In that case the law applies only if the tenant sends you written notice invoking it, and it takes effect 30 days later. The tenant can do that at any point in the tenancy.

Seasonal rentals of 125 consecutive days or less, to someone with a permanent home elsewhere, are exempt from the bank and investment rules below. You carry the burden of proving a rental is seasonal.

Where to hold the deposit and what to tell the tenant

The deposit remains the tenant's property. You hold it in trust and cannot mix it with your own money or treat it as your asset. Knowingly diverting it is a disorderly persons offense, with a fine of at least $200, up to 30 days in jail, or both.

Where the money goes depends on how many rental units you collect deposits for:

You may keep all tenants' deposits in one account if you meet every other requirement. For how deposit account rules differ across states, see how to store security deposits.

Each tenant must get a written notice with the name and address of the bank or fund, the type of account, its current interest rate, and the amount of the deposit. Send it:

1. within 30 days after you receive the deposit (DCA says this first notice can appear in the lease);
2. within 30 days after you move the deposit to another account or institution, when the move happens more than 60 days before the annual interest payment;
3. at each annual interest payment; and
4. within 30 days after you acquire the property, if you bought it with tenants in place.

Paying the tenant's interest each year

All interest the deposit earns belongs to the tenant. Since P.L.2003, c.188 took effect on January 1, 2004, New Jersey landlords may not keep any part of it as an administrative fee. Pay the interest in cash, or credit it toward rent due on the lease's renewal or anniversary date. You can pay on January 31 each year instead, but only after giving the tenant written notice of that date before the lease's next anniversary. Send the annual notice with each payment.

What happens if you miss a notice or an interest payment

If you do not deposit the money as required, skip a required notice, or fail to pay interest, the tenant can tell you in writing to apply the deposit, plus interest at 7% a year, toward rent now due or coming due. After that, you cannot ask that tenant for another deposit for as long as they live in the unit.

Example: a tenant who paid a $3,000 deposit 12 months ago and never received the 30-day bank notice can direct you to treat $3,210 ($3,000 plus 7%, or $210) as rent paid. On $2,000 rent, that covers one month and $1,210 of the next, and you hold no deposit for the rest of the tenancy.

For a missed annual interest payment or annual notice, the tenant must first give you written notice and 30 days to fix it, unless the annual notice also serves as notice of an account or institution change. DCA says that grace period does not apply when you never deposited the money properly in the first place.

Returning the deposit

Within 30 days after the lease ends, return the deposit plus the tenant's interest, minus lawful deductions, by personal delivery or by registered or certified mail. Send an itemized list of the interest and each deduction the same way within the same 30 days. Regular first-class mail does not meet the statute.

You may deduct for damage beyond ordinary wear and tear and for other money the tenant owes under the lease, such as unpaid rent. You cannot take deductions while the tenant still lives in the unit. If the tenant owes more than the deposit covers, you can sue for the difference.

These situations change the deadline:

• The tenant breaks the lease. DCA, citing a New Jersey court decision, says the lease ends when you re-rent the unit or the term expires, whichever comes first, and the 30 days start then. When a tenant breaks the lease early covers your options when a tenant leaves early.
• Fire, flood, condemnation, or evacuation. If an official posts the building as closed or an inspector certifies the displacement will last more than seven days, the deposit and interest, less lawful deductions and rent owed, must be available to the tenant on request within 5 business days, with an itemized statement. Within 3 business days after you learn of the displacement, tell the tenant in writing where and when to collect it, and keep it available for 30 days in the same municipality. If the tenant later moves back in, they repay the deposit in thirds: immediately, at 30 days, and at 60 days. If they do not, you can file for possession as you would for nonpayment of rent; see New Jersey eviction process for landlords.
• Domestic violence. If a tenant ends the lease under the Safe Housing Act, tell the tenant in writing within 3 business days where and when to collect the deposit, and have it available within 15 business days.

Under N.J.S.A. 46:8-21.1, if the tenant sues and the court finds for the tenant, it must award double the amount wrongfully withheld plus full court costs, and it may add reasonable attorney's fees. On a $1,800 deposit withheld without a lawful basis, that is $3,600 plus costs. Tenants can bring deposit claims in the Small Claims section of the Superior Court's Special Civil Part when the amount, including the doubling, is $5,000 or less.

When you sell or buy a rental

If you sell, turn over every deposit plus the tenant's interest to the buyer at the deed delivery or within five days after, and notify each tenant by registered or certified mail of the transfer and the buyer's name and address. Once you do that, you are released from liability for those deposits.

If you buy, the law makes it your duty to get the deposits and accrued interest from the seller. Whether or not the seller hands them over, you become responsible for investing the deposits, sending the notices, paying interest, and returning them. Send each tenant the new bank notice within 30 days after the transfer. Buying a currently occupied rental covers the tenant and lease details to check before you close.