A deposit is an economic security when renting out or loaning. This article describes the rules for deposits described in rent control laws along with the difference between predetermined rent and deposit.
What is a deposit?
The term deposit is often used in loan agreements or rental contracts, so when a person hands a residence or an object to another person that is then obligated to hand it back to the owner. In rental contracts, for example, landlords demand a sum of money as a deposit which functions as an economic security for while the tenant lives in the residence. This also means that the deposit has to be repaid unless the tenant has violated the contract.
Deposit in rent control laws
Rent control laws specify some rather fixed conditions for how to demand a deposit when renting out an apartment.
In § 34 of the Danish rent control law it says: “A landlord can demand a sum equal to 3 months’ rent as a deposit for renting out apartments and single rooms.” This is to say, that you can only demand an amount equal to 3 months’ rent as landlord. This provides security to the landlord that the tenant will meet the contractual requirements when they move out.
After the Danish rent control law was revised in 2015, it became illegal to use a tenant’s deposit to fully refurbish the residence. It is only allowed to use it for a normal renovation. Moreover, it can be used to pay rent arrears (outstanding rent payments) and accounts receivable in consumption statements (for example if the tenant has neglected to pay an electricity bill). This means that the refurbishment requires a real demand. The longer a landlord has lived in a residence, the smaller the tenant’s responsibility to refurbish it. Hence, the tenant is not accountable for normal wear and tear. In the event of a legal deficiency, this is naturally included in the evaluation of the residence’s condition.
The money not used for normal renovation has to be paid back to the tenant thereafter. In some cases it can be legally required to prepare a report: a final inspection report. It is only obligatory if the landlord owns more than one property. If this does not apply, it is enough to make the demand 14 days after the date of vacation at the latest. A deposit has to be repaid to the tenant immediately, meaning within 1-2 months.
Deposit and prepaid rent
Deposit and prepaid rent are not the same thing. A deposit is used to repair eventual damages and to cover the costs arising from contract violations described in the contract. In contrast, prepaid rent is used to cover the rent for the residence for the last months of the tenancy. This means your landlord can demand up to 3 months’ rent prepaid that you do not have to pay in the last 3 months of your tenancy if your notice period is 3 months.
Hence, prepaid rent is the landlord’s guarantee for you not suddenly vacating the residence. You can therefore be sure to receive the money back if you do not cancel the contract by moving out without notice.