Security Deposits in Lease Agreements: A New Standard for Landlords and Tenants

Historically, security deposits in Israeli rental agreements were largely unregulated. Landlords often demanded excessive deposits and frequently submitted checks to the court for collection, particularly during periods of rising housing costs and increased demand. This market volatility necessitated reform and the establishment of new standards.

In the summer of 2017, an amendment to the Landlord and Tenant Law, 1971, commonly known as the “Fair Rental Law,” came into effect. This amendment represents a significant step towards establishing a more regulated and equitable rental market.

The amendment substantially improved the rental market, primarily benefiting tenants. It dictates the format of rental agreements; specifies mandatory clauses; regulates the repair of property defects; defines uninhabitable dwellings; and addresses other key aspects.

The key provisions of the Fair Rental Law are summarized in a comprehensive guide for both landlords and tenants. A supplementary article details landlord responsibilities regarding property repairs (the responsibility is not always with the landlord). This article will address the crucial topic of security deposits in rental agreements, including permissible deposit amounts, collection procedures, and more. **Landlords and tenants alike should carefully review this article.**

**Important Note:** The Fair Rental Law does not apply to all rental agreements. Consequently, the information provided regarding security deposits may not be universally applicable. For a list of rental agreements excluded from the Fair Rental Law, click [here](https://www.dinolaw.co.il/%d7%97%d7%95%d7%a7-%d7%94%d7%a9%d7%9b%d7%99%d7%a8%d7%95%d7%aa-%d7%94%d7%94%d7%95%d7%92%d7%a0%d7%aa-%d7%94%d7%9e%d7%93%d7%a8%d7%99%d7%9a-%d7%9c%d7%9e%d7%a9%d7%9b%d7%99%d7%a8-%d7%95%d7%9c%d7%a9%d7%95/).

Permissible Security Deposit Amounts in Rental Agreements

Landlords almost always require security deposits from tenants to ensure compliance with the lease terms. While some landlords may only require guarantors instead of financial security, this practice is uncommon.

According to Section 25y of the Landlord and Tenant Law, a landlord may demand more than one security deposit. However, the total amount of all security deposits cannot exceed the lower of the following:

1. The agreed-upon monthly rent for one-third of the rental period (e.g., with a monthly rent of NIS 2,000 and a 12-month lease, the maximum deposit is NIS 8,000 (4 months x NIS 2,000)).
2. Three times the monthly rent.

Example: If the monthly rent is NIS 4,000 and the lease term is 12 months, the maximum permissible deposit is NIS 12,000 (the lower of NIS 16,000 (4 months x NIS 4,000) and NIS 12,000 (3 x NIS 4,000)).

Does Every Lease Breach Warrant Full Security Deposit Forfeiture?

No. Section 25y(c) stipulates that a landlord may only forfeit a security deposit under the following circumstances and for the specified amounts:

1. Non-payment of rent: The landlord may forfeit the deposit up to the amount of unpaid rent, plus interest and indexation as per the lease agreement.
2. Failure to repair tenant-responsible damages: The landlord may forfeit the deposit up to the cost of repairs.
3. Non-payment of recurring charges: The landlord may forfeit the deposit up to the amount of unpaid recurring charges (rent, property taxes, utilities, and maintenance fees).
4. Failure to vacate the premises at the end of the lease term: The landlord may forfeit the deposit up to the amount specified in the lease agreement.

Can a Landlord Forfeit a Security Deposit at Will Without Notice?

No. According to Section 25y(d) of the Landlord and Tenant Law, a landlord may only forfeit a security deposit if the following conditions are met:

1. The landlord notified the tenant of their intention to forfeit the deposit.
2. The landlord allowed the tenant a reasonable time to rectify the issue.

When Must a Landlord Return Security Deposits? Will Interest Be Included?

The landlord must return the security deposit or the remaining balance after forfeiture within 60 days of the property’s return to their possession or the settlement of the tenant’s debts, whichever is later (Section 25y(e) of the Landlord and Tenant Law).

The deposit must be returned “including its fruits”. This means that if the deposit accrued interest (e.g., in a deposit account), the landlord must return the deposit plus accumulated interest.

What if I Already Signed a Lease with an Excessive Security Deposit?

There is legal recourse to reclaim excessive deposits. Section 14(2) of the Fair Rental Law states that any stipulation concerning security deposits must favor the tenant. If a landlord demanded a lower deposit than legally permitted, it is acceptable. Conversely, if a landlord demanded a higher deposit, they violated the Fair Rental Law.

What if the Landlord Refuses to Return an Excessive Deposit?

If a tenant has already signed a lease agreement and paid an excessive security deposit, they can pursue several options. First, attempt to resolve the issue amicably without legal action (proceed cautiously, as statements made during negotiations could be used as evidence in court). If feasible, terminate the lease and demand the return of the deposit as stipulated in the agreement. If neither option is viable, file a small claims court case to seek appropriate redress, such as demanding the return of the excessive deposit, or seeking damages for breach of contract. Small claims court is often preferred due to its efficiency and lower costs compared to regular civil court proceedings.