Security Deposits in Leases: A New Standard for Landlords and Tenants

Historically, security deposits in Israeli rental agreements were largely unregulated. Landlords could demand excessive deposits and frequently initiate legal proceedings. This situation stemmed from rising housing costs, increased demand, reduced supply, and a strengthened bargaining position for property owners.

Subsequently, amendments to the Landlord and Tenant Law, 5731-1971, commonly known as the “Fair Rental Law,” were enacted in summer 2017 to address these issues and establish new standards in the rental market. This amendment represents a significant step toward a more regulated and equitable rental environment.

The amendment significantly impacts various aspects of rental agreements, primarily benefiting tenants. It dictates the format of rental contracts, specifies mandatory clauses, regulates the repair of property defects, defines uninhabitable dwellings, and more.

A comprehensive guide for both landlords and tenants outlining the key provisions of the Fair Rental Law is available in a separate article. Additionally, a related article details landlord and tenant responsibilities regarding property repairs. This article focuses on the crucial aspect of security deposits in rental agreements: permissible deposit amounts, methods of deposit release, and more. Landlords and tenants alike should carefully review this information.

**Important Note:** The Fair Rental Law does not apply to all rental agreements. Therefore, 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.

Permissible Security Deposits in Rental Agreements

Landlords almost always require security deposits from tenants to guarantee compliance with the lease terms. While some landlords may forgo financial security deposits and only require guarantors, this is uncommon.

Section 25(i) of the Landlord and Tenant Law allows landlords to request multiple security deposits; however, the total sum of all deposits cannot exceed the lower of the following amounts:

1. The agreed-upon monthly rent multiplied by one-third of the lease term (e.g., if the monthly rent is NIS 2,000 and the lease term is 12 months, the maximum permissible security 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 security 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)).

Full Deposit Forfeiture for Breach of Contract?

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

1. Unpaid Rent: The landlord may seize the deposit up to the amount of unpaid rent, plus interest and indexation as per the contract.
2. Unrepaired Tenant-Responsible Damages: The landlord may seize the deposit up to the cost of repairs.
3. Unpaid Recurring Payments: The landlord may seize the deposit up to the amount of unpaid recurring payments (rent, taxes including property tax, utilities including water, electricity, gas, and heating; homeowners’ association/management company fees (Section 25a(a) of the Landlord and Tenant Law)).
4. Non-Vacancy at Lease End: The landlord may seize the deposit up to the amount specified in the lease.

Unilateral Deposit Seizing by Landlord

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

1. The landlord notifies the tenant of their intent to seize the deposit.
2. The landlord allows the tenant a reasonable time to rectify the issue.

Security Deposit Return

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

Excessively High Security Deposits

If a lease agreement includes security deposits exceeding the legally permissible amount, the tenant has legal recourse to reclaim the excess funds. Section 14(2) of the Fair Rental Law states that any clauses regarding security deposits must benefit the tenant. If a landlord demands less than the permissible amount, it is legally sound. If a landlord demands more than permitted, they have violated the Fair Rental Law.

Dispute Resolution Regarding Excessive Deposits

If a tenant has already signed a lease and paid excessive security deposits, they can attempt amicable resolution before pursuing legal action (with caution as statements made during negotiations may be used as evidence in court). If terminating the lease is a viable option, terminate the lease and demand the return of the excessive security deposit as per the agreement. If neither of these options is suitable, filing a small claims lawsuit to seek appropriate remedies such as the return of excessive deposits or compensation for breach of contract may be pursued. Small claims court is often preferred due to its efficiency and lower cost compared to regular civil court.