Pennsylvania Court Adds ‘Last Month’s Rent’ to Definition of ‘Security Deposit’

As most residential landlords know, the Pennsylvania Landlord and Tenant Act (the “Act”) contains comprehensive and complicated rules and procedures regarding security deposits1. One such rule governs the amount a landlord may collect and hold as a security deposit.

Specifically, in the first year of the tenancy, the security deposit may not exceed an amount equal to two months’ rent. In the second and all subsequent years of the tenancy, the deposit may not exceed an amount equal to one month’s rent. Thus, in year two of the tenancy, the landlord must refund to the tenant an amount sufficient to ensure that the landlord is not holding more than one month’s rent.

Many landlords have routinely collected other amounts from tenants at the beginning of a lease term. For example, some landlords collect the last month’s rent at the beginning of the lease. Typically, this amount is collected in addition to, and without regard to, the security deposit.

This all changed in November 2017 when the Pennsylvania Superior Court ruled in E.S. Management v. Gao that such amounts constitute security deposits and must be included in the calculation of the amount of the deposit. The Court observed that landlords collect the last month’s rent to secure payment of amounts owed in the future. Clearly, the Court reasoned, such amounts constitute security deposits and must comply with the Act.

This means that landlords who wish to collect a double security deposit may not also collect the last month’s rent from a tenant at the beginning of a lease term. And, landlords who collect a one-month deposit plus the last month’s rent at the beginning of a lease term must refund all but one month’s rental amount if the tenant renews the lease beyond the first year.

Importantly, this decision is likely not limited to the collection of the last month’s rent. Rather, the Pennsylvania courts will most assuredly hold that this new rule also applies to pet deposits and pre-paid rents. In short, landlords should consider all amounts that they collect at the beginning of the lease, but that are not yet due, to be security deposits.

We will continue to monitor this and advise of any developments. In the meantime, landlords are cautioned to audit their security deposit practices, and to arrange for refunds or credits to tenants if necessary, to ensure compliance with this new definition of ‘security deposit.’