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Beware of interest on deposit when renting an apartment

Have you negotiated a security deposit with the tenant when renting the apartment? You should correctly return it with interest. And if you have not explicitly agreed on the amount, you can count on the interest usually demanded by banks in the borrower’s location. With the current rise in interest rates, it pays to keep an eye on everything, as the amounts involved may be far from negligible.

stěhování a vracení kauce
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Security deposit for rental contract

A security deposit, or security deposit for a rental agreement, is an insurance policy for the landlord against a number of unwanted situations, such as arrears of utilities or rent, or to cover damages that may have occurred to the furnishings.

A security deposit is not legally obligatory, so it is possible to get a tenancy without a security deposit. However, if there is a security deposit, it may be no more than three times the tenant’s monthly payment. This includes only the rent itself. Utility costs are not included in this calculation. So if the tenant pays CZK 25,000 per month, then you can set a security deposit of up to CZK 75,000. The six times the monthly payment previously allowed seemed over the edge to the legislator, as it did not allow many residents to even afford to start a home.

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Also, tripling the monthly payment may be an amount that many people are unable to pay in one lump sum, so paying in instalments 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, he could additionally negotiate a contractual penalty of CZK 50,000.

Tip: Do you want a bulletproof apartment rental agreement? The penalties in the lease agreement are very limited. But there are still ways to protect yourself effectively. How? Find out in our next article.

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.

Tip: There’s always the option of looking to rent an apartment or house without a deposit. You can read an article on this topic, in which we discuss what a security deposit is actually for, what its conditions are, and where to look for rental offers without a security deposit.

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 lease agreement on 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.

Tip: If a settlement doesn’t work, there is always the option of going to court. However, you will only succeed in court if the lawsuit is bulletproof. We will carefully analyze the case and take care of preparing a pre-suit notice, a lawsuit, an appeal, or straight up representation in court where we will vigorously enforce your rights.

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 performance of the same kind, each of them can express a will against the other aimed 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 set 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.

Tip: You can read all about safe renting in our article.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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