Check for Restrictions on Use of Advance Rent Payments

In a recent CLLI article, “Add Six Remedies to Discourage Chronic Lease Violations,” CLLI, Feb. 2003, p. 1, we told you about six remedies that you could include in a lease to help you discourage the tenant from becoming a chronic lease violator. One of those remedies would give you the right to make the tenant pay you rent in advance if it has chronically paid its rent late. We mentioned that getting rent payments in advance lets you earn additional interest (if the payments are promptly deposited in the bank) and pay off building costs or loans sooner. After reading that article, New York City attorney Larry M. Loeb informed us that there may be certain restrictions about which you should know if you resort to this remedy.

Local Law May Require Separate Bank Account

Loeb advises that you check your local law before getting rent payments in advance, because it may place restrictions on how those payments must be handled. For example, New York State law says that any rent payments made in advance remain the tenant's property and must be kept separate from your money, he says. You're required to deposit the tenant's advance rent payments in a separate bank account and notify the tenant of the deposit's location, he says. If the account pays interest, you can keep only a small portion of the interest—to compensate you for your administrative costs—with the rest going to the tenant, he adds. And you're entitled to withdraw money from the account only as the rent becomes due, he says.

Advance Rent Payments Still Have Benefit

Even if local law restricts your ability to use the rent payments before the rent is due, it may still be a good idea for you to get the advance rent, says Loeb. You then can quickly gain access to the funds when the rent is due and not have to chase after the tenant for it, he explains.

CLLI Source

Larry M. Loeb, Esq.: Partner, Kramer Levin Naftalis & Frankel LLP, 919 Third Ave., New York, NY 10021-3852; (212) 715-9114.