Beware of interest on deposit when renting an apartment

Chapters of the article

• Security deposit for a lease agreement
• Relationship between security deposits and contractual penalties
• Interest on the security deposit
• Set-off of security deposit

Security deposit in a tenancy agreement

A security deposit, or security deposit on a tenancy agreement, provides the landlord with insurance against a number of unwanted situations, such as arrears of utilities or rent, or to cover any damage that may have occurred to the furnishings of the property.

It may be up to a maximum of three times the tenant’s monthly payment. This includes the rent itself and the service charges. If the tenant pays CZK 25,000 per month, you can set a security deposit of up to CZK 75,000. The six times the monthly payment previously allowed seemed to the legislator to be over the edge, as it did not allow many residents to even achieve a housing start.

Also, tripling the monthly payment may be an amount that many people are unable to pay in one lump sum, so paying in installments is not ruled out. This step will allow the landlord to obtain the security deposit at the level they require, while at the same time achieving a process acceptable to a larger number of potential tenants.

Relationship between the security deposit and the contractual penalty

If the security deposit is negotiated at the maximum possible amount, i.e. the three times the monthly payment already mentioned, it should also include any penalty. In other words, the contractual penalty can no longer be set above that amount. Even if it is agreed separately in the contract. However, if the landlord only requires a security deposit of one monthly payment, then in the above-mentioned case, they could additionally negotiate a contractual penalty of CZK 50,000.

Interest on the security

An interesting issue is the possibility of requiring the landlord to pay interest on the return of the security deposit. Although many tenants do not apply this in practice, they are legally entitled to do so. Only the amount of interest is disputed if it is not expressly agreed. The law on this states that if interest is to be paid and the amount is not known, then ‘the normal interest required for loans granted by banks in the place of residence or registered office of the borrower at the time of conclusion of the contract’ shall apply.

However, such a definition provides only partial guidance. On the contrary, it raises other questions, namely which are the banks whose credit policy is being assessed and which loans will be taken into account.

In general, the range will be approximately 4-16% per annum. If, for example, we assume an interest rate of 10% and a deposit of CZK 75,000, the annual interest rate would be CZK 7,500. With a three-year lease, the landlord would then return CZK 23,500 in interest, and that is no small amount. The real calculation would be a bit more complicated, because the amount of interest changes over time. Given the rather sharp rise in interest rates in recent months, it is more than advisable to think about this aspect of the contract in advance.

To avoid paying too much interest and, above all, to avoid confusion and possible litigation, there are several solutions: The best solution is a problem that does not arise at all. Therefore, consult a lawyer when drawing up the contract to find out the best and most advantageous way to set up the contract. You can negotiate a low security deposit and have the apartment well insured, negotiate upfront interest at a rate that is acceptable to you, or have the security deposit already included during the lease. An experienced attorney will set everything up correctly depending on the type of property and the contractual relationship.

If you are already at the stage of dealing with interest payments and cannot agree on the amount, try to reach an agreement in the first place. You certainly don’t want to increase your payment by legal fees. Even at this stage of the settlement, you will certainly benefit from the advice of a lawyer.

Set-off of security

Set-off is one of the methods of payment of claims, the essence of which is that if the parties have mutual claims against each other with the same type of performance, each of them can express a will against the other, aiming precisely at the set-off. If, at the end of the tenancy, the landlord has any remaining claims on the tenant, the security deposit is therefore used to pay them.

In the case of arrears of rent or services, the amount of the arrears is usually clear and can be avoided without mutual contestation. In the case of compensation for damages, the landlord should then quantify the damages and subsequently offset them against the security deposit. This does not require a written acknowledgement of the debt by the tenant or some type of decision to set off.

However, if the amount of the damage is disputed by the tenant, there is no option but to litigate the existence and amount of the damage. As a precautionary measure, a detailed description of the furnishings of the apartment, including the value of the furnishings, can be included in the handover report at the commencement of the tenancy.