Security Deposit: Understand how this type of guarantee works

If you're looking to rent a house or store, you've probably come across the term "security deposit." This security deposit is generally required before you can proceed with the rental process.

However, many people don't know exactly how the security deposit works and what the laws are, for example, regarding the use and return of this money.

Therefore, in this article, we'll provide you with all the information you need about security deposits. Read on to learn more!

You will read in this article:

• What is a security deposit?
• How does it work?
• What types of security deposits are there?
• What does the tenancy law say about the security deposit?
• When can the security deposit be used?
• How does the correction in the security deposit work?
• Is the security deposit returned?
• How to calculate the rental deposit refund?

What is a security deposit?

A security deposit refers to an amount of money or assets that is deposited by one party as collateral in a transaction or contract. This deposit provides protection for the receiving party, ensuring that the depositing party will fulfill its obligations under the terms of the contract.

This type of deposit is commonly used in various situations, such as property rentals, equipment lease agreements, service provision contracts, among others.

In the context of renting, the tenant may be asked to make a security deposit as a guarantee that he will comply with the terms of the contract, return the property in good condition and pay all agreed expenses.

If the depositing party complies with all the terms of the contract, the security deposit is returned at the end of the agreed term. However, if the terms of the contract are violated, the deposit may be withheld or used to cover damages or losses caused by the depositing party.

How does the security deposit work?

The security deposit in property rentals is a common practice and aims to protect the owner against possible damage to the property or default by the tenant.

See how the security deposit works in this context:

• Contractual Agreement: At the time of signing the lease, the parties agree to include a security deposit as part of the terms of the lease.
• Deposit Amount: The deposit amount is agreed upon by both parties. In many cases, it's common to set the amount equivalent to one or two months' rent, but this can vary.
• Deposit Payment: The tenant pays the deposit amount in the agreed form (usually cash, check or bank transfer) at the beginning of the lease.
• Deposit Custody: The deposit is held in escrow, usually in a separate bank account, or sometimes through a rental bond. This is done to ensure the funds are available when needed.
• Property Inspection: Before a tenant moves in, it's common to conduct a property inspection. Any damage is documented to avoid disputes when returning the deposit.
• Compliance with Contractual Conditions: If the tenant complies with all the terms of the lease, such as paying rent on time and keeping the property in good condition, the deposit will be returned in full at the end of the lease.
• Deposit Retention in Case of Violation: If there is a breach of the terms of the contract, such as damage to the property or default, the landlord has the right to retain part or all of the deposit to cover the losses.
• Deposit Refund: At the end of the lease, and after a new inspection, if there are no issues, the deposit is returned to the tenant. This usually happens within a timeframe stipulated in the contract.

It's important that all conditions regarding the security deposit are clearly defined in the lease agreement, including the criteria for retaining and returning the deposit. This transparency helps avoid misunderstandings and conflicts between the landlord and tenant at the end of the lease.

What types of security deposits are there?

There are different types of security deposits, and the choice of type may depend on the preferences of the parties involved in the contract, local laws, and specific policies.

Some common types of collateral include:

Cash security deposit

A cash security deposit is a common practice in contracts and transactions where one of the parties seeks financial guarantees to fulfill the obligations stipulated in the agreement.

In the context of property rentals, for example, it is often used as a way to ensure that the tenant will comply with the terms of the contract, paying rent on time and keeping the property in good condition.

The amount of the cash deposit is usually agreed upon by the parties and can vary, but it's typically equivalent to one or two months' rent. Some jurisdictions may have specific regulations that limit the deposit amount.

The deposit is usually handed over by the tenant to the landlord or a designated party, such as a real estate agent. In many cases, it's recommended to keep this money in a separate bank account to ensure it's available when needed.

Before occupancy, it's common to conduct a detailed inspection to document the property's current condition. This helps avoid disputes over deposit retention in the future if the property is damaged during the rental period.

If the tenant complies with all the terms of the lease, the deposit is returned in full at the end of the lease. This usually occurs within a timeframe stipulated in the lease.

Security deposit in securities

Escrow refers to a practice in which, instead of providing cash as collateral, the depositing party provides financial securities as collateral. These securities may include certificates of deposit (CDs), government bonds, stocks, or other financial instruments with monetary value.

The choice of securities to be used as collateral can be negotiated between the parties involved in the contract. The depositor can transfer ownership of these securities to the receiving party, who can retain them until the contractual obligations are fulfilled.

The value of the securities used as collateral must be agreed upon by the parties. The value is often equivalent to the amount that would be required for a cash deposit.

As with cash escrow, it's important to establish proper custody for the securities. The securities can be held in a dedicated escrow account or transferred to the receiving party.

The liquidity of the securities chosen can influence both parties' decisions. More liquid securities are more easily converted into cash if collateral is needed to cover losses.

At the end of the contract, if all conditions are met, the securities can be returned to the depositor. This is usually done after a final check to ensure that the contractual conditions have not been violated.

Security deposit in shares

Depositing securities as collateral is less common than depositing cash, but it is still an option that can be used in some contracts, especially in more complex commercial agreements.

In this scenario, the depositing party provides shares as collateral instead of cash.

Choosing the shares to use as collateral is an important aspect. The parties involved can agree on the specific shares to be transferred as collateral. Typically, shares of companies with good liquidity and a stable market value are chosen.

The parties must agree on how the shares will be valued to determine the value of the collateral. This can be done based on the current market price of the shares or through an agreed-upon valuation method.

Shares transferred as escrow may be held in escrow, usually in a designated account, which may be managed by a financial institution or other trusted party.

At the end of the contract, if all conditions are met, the shares can be returned to the depositing party. Return usually occurs after a final check to ensure that the contractual terms have not been violated.

What does the tenancy law say about the security deposit?

The Tenancy Law (Law No. 8,245/1991) regulates urban property lease agreements in Brazil. According to the law, a security deposit is a type of rental guarantee that can be requested by the landlord from the tenant.

The security deposit is a sum of money that is deposited in a joint savings account between the landlord and tenant, and which serves as a guarantee for any defaults by the tenant, such as late payment of rent, damage to the property or even early termination of the contract.

The security deposit cannot exceed the equivalent of three months' rent. The security deposit must be paid within 30 days of signing the lease agreement.

The security deposit must be returned to the tenant within 30 days of the end of the lease, adjusted by the SELIC rate. The landlord may retain part of the security deposit to compensate for any losses caused by the tenant, but must provide proof of the damage.

It is important to remember that the tenant is entitled to interest on the deposit, which is calculated using the SELIC rate.

The tenancy law also establishes some specific rules for cash deposits:

• The deposit must be deposited in a savings account, authorized by the Public Authority and regulated by it.
• The proceeds from the deposit must be returned to the tenant.
• The landlord must provide the tenant, within 30 days after the end of the lease agreement, with a statement of the security deposit balance, including interest and any discounts.

The security deposit is an important guarantee for both parties involved in the lease agreement. The landlord is assured of reimbursement in the event of default or damage to the property, while the tenant is assured of receiving their money back upon termination of the lease.

When can the security deposit be used?

According to the Tenancy Law, the security deposit can be used by the landlord in the event of:

• Tenant's default in paying rent, or any rental charges, such as condominium fees, property tax (IPTU), or water and electricity bills.
• Damage caused to the property by the tenant, whether through negligence, recklessness or intent.
• Early termination of the lease agreement due to the tenant's fault.

In the event of default, the landlord may use the security deposit to pay off the tenant's debts, including rent, rental charges, and fines stipulated in the contract.

In the event of damage to the property, the landlord may use the security deposit to repair the damage, or to offset the value of the damage if repair is impossible or excessively costly.

In the event of early termination of the contract due to the tenant's fault, the landlord may use the security deposit to compensate for losses incurred, such as the cost of finding a new tenant, or losses resulting from early vacating of the property.

The landlord must provide proof of damage or default in order to retain part of the security deposit. This proof can be provided through photos, estimates, or even witnesses.

If the landlord fails to provide proof, the tenant may go to court to demand the return of the deposit in full.

When can the security deposit be returned?

According to the Tenancy Law, the security deposit must be returned to the tenant within 30 days after the end of the lease, adjusted by the SELIC rate. The landlord may retain part of the security deposit to compensate for any losses caused by the tenant, but must provide proof of the damage.

Therefore, the security deposit may be returned to the tenant in the following situations:

• After the contract ends, without any pending issues or damage to the property. In this case, the landlord must return the full amount of the deposit, adjusted by the SELIC rate.
• After the contract ends, upon presentation of proof of damage to the property. In this case, the landlord may retain part of the deposit to repair the damage, or to offset the value of the damage if repair is impossible or excessively costly.
• After the end of the contract, upon presentation of proof of default by the tenant. In this case, the landlord may retain part of the deposit to pay off the tenant's debts, including rent, rental charges and fines stipulated in the contract.

How does the correction in the security deposit work?

The security deposit is adjusted based on the SELIC rate, the Brazilian economy's benchmark interest rate. The SELIC rate is calculated daily by the Central Bank of Brazil and is published on the Central Bank's website.

The deposit is adjusted automatically, without any action required by the landlord or tenant. The deposit amount is adjusted on the day it is returned, based on the current SELIC rate.

The tenant is entitled to interest on the security deposit, which is calculated using the SELIC rate. The security deposit interest is adjusted automatically on the same day the security deposit is adjusted.

Frequently asked questions about security deposit?

Check out some very common questions about the security deposit below:

Is the deposit returned?

Yes, the security deposit is generally returned at the end of the contract or transaction, provided all contractual conditions have been met. This includes timely payment, proper property maintenance, and the absence of significant damage. The refund may be adjusted in the event of default or damage, and the terms for the refund should be clearly defined in the initial contract.

When must the security deposit be returned?

The security deposit must be returned at the end of the contract or at the end of the transaction, provided all contractual obligations are met. Return is subject to specific conditions, such as a satisfactory inspection and the contract being terminated without violations. Return terms should be clearly defined in the initial contract, and applicable local laws should be considered.

Should the security deposit be returned corrected?

Yes, the security deposit must be returned adjusted. The adjustment is based on the SELIC rate.

How to calculate the rental deposit refund?

The calculation of the correction of the security deposit is made according to the SELIC rate, which is the basic interest rate in Brazil.