ADVANCE RESERVATION PAYMENTS
MAY FALL UNDER TENANT SECURITY
DEPOSIT ACT

Understandably, owners of resort rental property would like to "smooth" the cash flow for their properties during the "off-season." Accordingly, many real estate agents and property managers have assisted them by collecting "advance rents" or "reservation deposits" and disbursing them to the owners as soon as they are received.

For several years, the Real Estate Commission has advised licensees in the resort industry that the early disbursement of advance rents to landlords was permissible under the Real Estate License Law and Commission Rules if the tenant consents to such early disbursement. But the Commission has not encouraged this practice, recognizing that the agent may incur liability and possible damage to his reputation should the owner default and fail to return money to the tenant.

However, the North Carolina Attorney General's Office has now advised the Commission that, under certain circumstances, these payments may be subject to the Tenant Security Deposit Act (Article 6, Chapter 42, N.C.G.S.)

The Attorney General concluded that where funds are collected for purposes other than the simple payment of rent, they may fail under the definition of "security deposit," and must, therefore remain in a designated trust or escrow account until the premises are vacated by the tenant.

To determine whether the funds are "rents" or whether they, in fact, constitute a "security deposit," each case must be examined individually and a complete reading of the entire rental agreement performed. However, the funds will probably be considered "security deposits" under the Tenant Security Deposit Act if:

1. The tenant would forfeit the funds if he fails to pay the balance of the rent; or

2. The owner or his agent may, in his discretion, deny the tenant possession of the premises; or

3. The funds are referred to or described in the rental agreement as a "deposit."

Licensees who engage in the advance disbursement of funds should carefully review their documents, and if the documents provide for the collection of funds for purposes other than the simple payment of rent, then they should take necessary measures to bring their practices into compliance with law.