If you are among the regular readers of our blog, you will know that we have covered the topic of security deposits several times in the past. This financial deposit for landlords, capped by law at a maximum of three months’ rent, comes with its own clearly defined rules.
These currently include the tenant’s right to have the security deposit returned together with interest. The rate, however, should be stated in the contract, otherwise both parties have to rely on the very vague wording set out in the Civil Code and on a mutual willingness to reach a sensible agreement.
Don’t confuse a security deposit with a consumer loan
The Civic Association of House Owners in the Czech Republic (OSMD) issued a statement in February that the Rental Housing Association later endorsed. Its key point is a firm objection to the idea that a security deposit should effectively be treated as a consumer loan, provided by the occupant of the flat (the tenant) to its owner (the landlord).
Both the ANB and the OSMD consider the notion that a tenant turns to a landlord “as if to a bank” to be entirely mistaken
“Such an approach reflects neither the legal nature of the security, nor the economic nature of rental relationships,” the Rental Housing Association explains. Both the ANB and the OSMD regard the debate on the legal framework for deposits as important, but in their view it must respect the main function these entrusted funds serve. That is, a form of security for the landlord, ensuring there are funds available to cover any damage caused by the tenant.
Housing is not meant to serve as a bank
“The relationship between a tenant and a landlord is not in the nature of the services provided by financial institutions,” the industry association adds. In its current form, it would in essence represent a risk-free investment for tenants, with a return that in a long-term tenancy could easily run into tens or hundreds of thousands of crowns. The owner of the flat, by contrast, would always have to take on a degree of risk.
“Landlords must keep the deposited money easily accessible in case the tenancy comes to an end. This means they cannot trade it on the financial markets in pursuit of the highest possible return while taking on investment risk,” the association points out. In Germany and Austria, for example, legislation explicitly imposes on landlords an obligation to keep the deposit safely. Many European countries require landlords to return the deposit without undue delay, with penalties for late repayment.
Funds held as a security deposit can in theory generate returns, but they must do so safely and without investment risk for either party
Returns limited to safe deposit rates
“The OSMD is convinced that the Czech legal interpretation should follow the same logic. Interest on the security should correspond to a safely achievable deposit return, not to the price of consumer loans,” says Milan Krček, chairman of the Civic Association of House Owners, appealing to lawmakers.
In other words – interest can in theory continue to be paid, but only up to the easily verifiable level of interest on a current or savings account (i.e. a deposit return), even though the latter instrument also carries certain risks. In practice, it would be enough, for instance, to set up a separate virtual account at a bank for each deposit paid and, at the end of the tenancy, return exactly the amount held in it.
Jakub Vysocký, president of the Rental Housing Association, stresses that it would be advisable to open a dialogue as soon as possible between legislators and experts with decades of hands-on experience of how the rental housing market works. “We support swift, clear, comprehensive and balanced legislation on security deposits and on the entire process surrounding them. If that happens, it will ultimately be another important step towards supporting the growth and affordability of rental housing,” Vysocký adds.
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