LANDLORD AND TENANT ‑- INTEREST ‑- RENT ‑- MAINTENANCE OF LANDLORD-TENANTS' SECURITY DEPOSITS ‑- RIGHT OF TENANT TO INTEREST

LANDLORD AND TENANT ‑- INTEREST ‑- RENT ‑- MAINTENANCE OF LANDLORD-TENANTS' SECURITY DEPOSITS ‑- RIGHT OF TENANT TO INTEREST

(1) RCW 59.18.270 does not require a landlord to maintain separate account for each tenant's security deposit; accordingly, the landlord may maintain a single account for the security deposits of all his tenants.

(2) If interest is earned through the investment of a tenant's security deposit, that interest belongs to the tenant.

(3) Interest earned on a tenant's security deposit may be retained by the landlord as a part of his rental charges for the premises involved if express provision to that effect is included in the rental agreement.

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                                                                   May 28, 1974

Honorable Jeanette C. Hayner
State Representative, 16th District
830 E. Chestnut
Walla Walla, Washington 99362

                                                                                                                 Cite as:  AGO 1974 No. 11

Dear Representative Hayner:

            This is in response to your request for our opinion on several questions relating to the landlord-tenant relationship under chapter 207, Laws of 1973, 1st Ex. Sess., (now codified as chapter 59.18 RCW).  We paraphrase your questions as follows:

            (1) Does RCW 59.18.270 require a landlord to maintain a separate account for each tenant's security deposit or may a landlord maintain a single account for the security deposits of all his tenants?

            (2) If interest is earned through the investment of such security deposits, who is entitled to receive that interest, the landlord or the tenant?

            (3) If any interest earned on such security deposits is  [[Orig. Op. Page 2]] deemed to be the property of the tenant, may it nevertheless be retained by the landlord as a part of his rental charges for the premises involved if express provision to that effect is included in the rental agreement

            We answer your questions as set forth in our analysis.

                                                                     ANALYSIS

            By its enactment of chapter 207, Laws of 1973, 1st Ex. Sess., (now codified as chapter 59.18 RCW) the legislature established a comprehensive new code regulating the legal relationships between residential landlords and tenants.  Under this code it is anticipated that some landlords may require tenants to make certain monetary deposits as security for their performance of obligations arising under a lease or rental agreement.  If that is done, the following provisions of §§ 26-28, now codified as RCW 59.18.260-59.18.280, apply:

            "If any moneys are paid to the landlord by the tenant as a deposit or as security for performance of the tenant's obligations in a lease or rental agreement,such lease or rental agreement shall include the terms and conditions under which the deposit or portion thereof may be withheld by the landlord upon termination of the lease or rental agreement.  If all or part of the deposit may be withheld to indemnify the landlord for damages to the premises for which the tenant is responsible, or if all or part thereof may be retained by the landlord as a non-returnable [[ (nonreturnable)]]cleaning fee, the rental agreement shall so specify.  No such deposit shall be withheld on account of normal wear and tear resulting from ordinary use of the premises."  (RCW 59.18.260.)  (Emphasis supplied.)

            "All moneys paid to the landlord by the tenant as a deposit as security for performance of the tenant's obligations in a lease or rental agreement shall promptly be deposited by the landlord in a trust account in a bank, savings and loan association, mutual savings bank, or licensed escrow agent located in Washington.  The landlord shall  [[Orig. Op. Page 3]] provide the tenant with a written receipt for the deposit and shall provide written notice of the name and address and location of the depository and any subsequent change thereof.  Thetenant's claim to any moneys paid under this section shall be prior to that of any creditor of the landlord, including a trustee in bankruptcy or receiver,even if such moneys are commingled."  (RCW 59.18.270.)  (Emphasis supplied.)

            "Within fourteen days after the termination of the rental agreement and vacation of the premises the landlord shall give a full and specific statement of the basis for retaining any of the deposit together with the payment of any refund due the tenant under the terms and conditions of the rental agreement.  No portion of any deposit shall be withheld on account of wear resulting from ordinary use of the premises.

            "The notice shall be delivered to the tenant personally or by mail to his last known address.  If the landlord fails to give such statement together with any refund due the tenant within the time limits specified above he shall be liable to the tenant for the amount of refund due.  In any action brought by the tenant to recover the deposit, the prevailing party shall additionally be entitled to the cost of suit or arbitration including a reasonable attorney's fee.

            "Nothing in this chapter shall preclude the landlord from proceeding against, and the landlord shall have the right to proceed against a tenant to recover sums exceeding the amount of the tenant's damage or security deposit for damage to the property for which the tenant is responsible together with reasonable attorney's fees."  (RCW 59.18.280.)

            In order to place your questions in proper focus, let us address ourselves to the following hypothetical case:

            The monthly rent for a certain apartment is $150.  The landlord requires the tenant occupying this apartment initially  [[Orig. Op. Page 4]] to pay the first and last months' rent ($300), a nonrefundable cleaning deposit of $25, and a refundable damage deposit of $75, for a total of $400.  Of this amount, $225 is a security deposit for the purposes of RCW 59.18.260, et seq., because the $150 payment for the last month's rent in advance is actually a deposit to protect the landlord in the event of a default by the tenant under certain later provisions of the act now codified as RCW 59.18.310.  The $75 refundable damage deposit is clearly a security deposit.  On the other hand, the nonrefundable cleaning deposit of $25 is not such a deposit by virtue of RCW 59.18.260 itself, along with RCW 59.18.130(6), and since this payment is clearly nonrefundable, it becomes the property of the landlord upon payment to him.

            Question (1):

            Your first question is whether the landlord is required to maintain a separate account for each tenant's security deposit ‑ here, the above‑described $225 ‑ or may the landlord maintain a single account for the security deposits of all his tenants?

            As we indicated at the outset, the purpose of these deposits is to provide security for the performance of the tenant's obligations under the lease or rental agreement.  If the tenant fails to perform these obligations, then the deposit or a portion thereof can become the property of the landlord pursuant to RCW 59.18.280.  Moreover, it is clearly contemplated by RCW 59.18.270 that the landlord will physically receive from the tenant the funds which constitute the deposit, and upon such receipt he is promptly to deposit these funds in an account with a bank, savings and loan association or mutual savings bank or with an escrow agent, and to give a written notice to the tenant identifying the depository.  This physical receipt of the funds and their transfer to a depository by the landlord does not, however, change the nature of the ownership of the funds.

            We read RCW 59.18.270 as requiring the deposits to be placed in an escrow type of account with one of the types of institutions listed therein ‑ noting the specific reference to the possibility of the deposit being with a "licensed escrow agent."  Furthermore, this same section of the act provides that the tenant's claim to any moneys paid under this section shall be prior to that of any creditor of the landlord, including a trustee in bankruptcy or receiver.  This language is consistent with the concept of an escrow account with the tenant retaining  [[Orig. Op. Page 5]] ownership of the funds until the conditions giving rise to their passage to the landlord have occurred.

            The purposes of the statute in so providing for the handling of these deposits are (1) to separate them from the assets of the landlord and (2) to insure that the deposited funds will in fact be available for a return to the tenant to the extent that he is entitled to a refund at a later date.  While these purposes would be achieved by having a separate account for each tenant's deposit, the same protection may also be afforded by an escrow type account commingling the deposits of various tenants so long as exact records are maintained as to each tenant's share of the total deposit.  Neither RCW 59.18.270 nor any other provision of the act affirmatively requires that separate accounts be established by the landlord for the deposit of each tenant ‑ as contrasted with a single account exclusively for deposits by all tenants. Accordingly, in response to your first question, we conclude that such a single account may be used for the security deposits of all tenants of a given landlord, provided sufficient records are maintained clearly to identify each tenant's share of the total deposit.

            Question (2):

            Next you have asked:

            If interest is earned through the investment of such security deposits, who is entitled to receive that interest, the landlord or the tenant?

            In the course of our discussion above we have concluded that the deposited funds remain the property of the tenant during the period in question ‑ until a transfer of ownership occurs by virtue of the tenant's failure to meet his obligations.  See, RCW 59.18.280.  It therefore follows that any interest which is earned through investment of the deposited funds will belong to the tenant.

            Question (3):

            Your final question assumes the foregoing answer to question (2) and asks:

            If any interest earned on such security deposits is deemed to be the property of the tenant, may it nevertheless be retained by the landlord as a part of his rental charges for the premises  [[Orig. Op. Page 6]] involved if express provision to that effect is included in the rental agreement?

            The issue raised by this question involves so much of RCW 59.18.230(2) as states that:

            "No rental agreement may provide that the tenant:

            "(a) Agrees to waive or to forego rights or remedies under this chapter; . . ."

            There can be no doubt but that this provision will render void and unenforceable any provision in a rental agreement purporting to have the tenant waive his right to receive any interest earned through the landlord's investment of the security deposit.  On the other hand, because there is nothing in the act which attempts to regulate the amount which a landlord may charge a tenant as rent, it therefore follows that while the tenant may not "waive" his right to receive such interest, he most definitely may use the interest thus earned to pay the rental agreed upon ‑ and that the agreed upon rental, in turn, may include, in effect, an assignment of the interest to the landlord.

            What we here visualize, lest there be any misunderstanding, is an explicit provision in the rental agreement stating, in essence, that the "rent shall be     dollars per month, PLUS SUCH INTEREST AS MAY BE EARNED THROUGH INVESTMENTS BY THE LANDLORD OF THE TENANT'S SECURITY DEPOSIT DURING THE TERM OF THE LEASE" or words to that effect; i.e., words clearly designed to apprise the tenant as to the nature of the arrangement.  Conversely, although not prohibited by the landlord-tenant act itself, any attempt by a landlord to "bury" this provision in the small print of the standard form contract in a manner not designed to come to the attention of an ordinary tenant could well run afoul of such cases as Berg v. Stromme, 79 Wn.2d 184, 484 P.2d 380 (1971), citingHenningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A. 2d 69 (1960), andAdams v. Egley, 338 F. Supp. 614 (1972), citingLaprease v. Raymours Furniture Company, 315 F. Supp. 716 (1970).  The essential message we derive from a reading of these cases is that the old rule ofcaveatemptor has little relevance to the renting of premises in our modern society and that the courts now are inclined to look with great disfavor upon clauses in standard form contracts that are adverse  [[Orig. Op. Page 7]] to the rights of consumers in consumer transactions, at least where the clause in question was not specifically negotiated and bargained for between the parties.

            We trust that the foregoing will be of some assistance to you.

Very truly yours,

SLADE GORTON
Attorney General

EDWARD B. MACKIE
Deputy Attorney General