Holding Fees in Leases, Explained!
So you're about to sign a new lease on a property, and you notice there is something called a "holding fee" in the additional terms and conditions section. The verbiage on it says something to the effect of, "Tenant to pay holding fee equivalent to one month's rent at lease signing. Holding fee shall be non-refundable, but shall convert to tenant security deposit at lease commencement." What. The. Heck?! I have to pay MORE money?! This is a total RIP OFF and a SCAM, right?!
It's totally allowable in North Carolina! Usually, there is a valid reason for its use; however. Using my Firm as an example: we have a market with a peak season hugely influenced by soldiers PCSing (permanent change of station) to and from the area always. Particularly, we see our rentals start warming up in March, and declining in October; May through August being the busiest. Often (though not always), servicemembers get their orders a few months in advance. And then they start trying to find a place, knowing competition is stiff this time of year. We receive an application, and the home is sight unseen! They're simply going off the photos and usually talking with in advance.
Because they're sometimes looking months in advance, one of two things can happen. 1.) They are applying for a house that is available, now, and they want to move in a few months. Normally this is declined by the owner of the property, because they will lose the rent money over those few months, even with a holding fee in place. 2.) The house is available in a few months; in line relatively with their anticipated move. This is more common, and will cause us then to add a holding fee, in order for us to take the home off the market for such a long period of time.
What if I sign the lease in advance, and later find out I cannot fulfill the lease?
If you as the tenant cannot fulfill the lease for whatever reason, you need to speak with your property manager immediately. They will expect you to move forward, regardless of your change in circumstances. The holding fee is NOT a lease termination fee. The holding fee is purely to hold the property off the market. You may also be assessed a lease termination fee. You may also have to pay rent for the pro-rated days it takes to re-rent the property (and yes, in this regard, there are specific rules that govern actual rent. Likely you'd pay the full month, and then get reimbursed the pro-rated amount after the property re-rents, and the landlord is legally obligated to "reasonably" work to get it re-rented).
There's a clause stating the holding fee will convert to the tenant security deposit at lease commencement. What does that mean?
Not all landlords do this. We do it, as a gesture of good faith, while still being able to protect our property owners. We realize many of our tenants are servicemembers, and coming up with the money to afford a holding fee as well as the security deposit, rent, pet fees, etc. is often difficult. So, we have the security deposit amount paid as the holding fee, then convert it to the tenant security deposit when the lease starts. This allows us to keep the holding fee in the event the tenant backs out, which protects the owners, but also makes the move in payments a bit easier on the tenants, as their security deposit is thus essentially paid in advance, leaving just rent and possibly pet fees to be paid on or before the lease start date.
Is the holding fee ever really refundable?
This is where all those years of English class come into play. There is a significant difference between the words "fee" and "deposit". We use them very carefully, and they are NOT interchangeable! I explain this in a different post. That said, fees are typically non-refundable, where deposits typically are refundable (see why words matter?!). While I cannot speak for all Firms or managers, I can say there are a few instances where fees could or would be refundable.
1.) If the house is damaged beyond habitable condition (i.e. hurricane, tornado, act of God, etc), and the landlord cannot convey the home to you, the tenant, then the fee would be refundable.
2.) If there is mutual agreement between you the tenant and the landlord, the fee can be returned. This can happen if we were able to re-rent the property without injury to the landlord. It has happened where a servicemember received fees back (holding and pet) because their orders changed. The landlord was a servicemember as well, and understood, and were able to rent the property two days after their lease start date, causing only a minor inconvenience. Still, that was the owner's decision to return the fees; not the manager's.
Long story short, it definitely may seem unreasonable or unfair to you, the tenant, if you're being charged a holding fee. That said, it can also be a reasonable means to secure a property in advance; particularly in the busy season when homes seem to rent in record time. It is always a risk putting money down like that, certainly, so the advice is to read everything carefully, ask questions, and only move forward if you're willing to take the risk