When we talk about holding rent payments in escrow, we could be discussing a few different things. From a landlord’s perspective, you might hold the last month’s rent in escrow. You collect it from the tenant before they move into your property, but you don’t actually treat it as your own money since it’s been set aside to pay for the last month’s rent during the tenancy. You’re basically holding that payment in escrow until month 12 rolls around and the rent is due.
We could also be talking about holding rent payments in escrow from a tenant’s perspective. Maybe a repair was requested and a month has gone by but the landlord has not addressed the issue or indicated there’s been any plan made for a repair or a replacement. In this case, tenants might want to withhold rent until the repairs are made. The laws in Oregon and Portland do not allow tenants to withhold rent payments or put them in escrow. If it’s a habitability issue, the tenant can hire someone to make a repair that the landlord refuses to make and withhold up to $300 in rent in order to pay for that repair.
This can be a confusing topic, so we’re using our experience as Portland property management experts to talk about how Portland landlords should withhold rent payments in escrow.
Here’s an overview of what this means and how it’s done.
Holding a Tenant’s Last Month’s Rental Payment
In Oregon, a landlord can require that a tenant pay the first month’s rent, the last month’s rent, and a separate security deposit before moving into the rental home. If you decide that you’re going to collect both the first and last month’s rent, the law sees that last month’s rent as part of the security deposit. When a condition of this tenancy is that the security deposit includes the last month’s rent, you cannot collect as a separate security deposit more than the equivalent of one-half of one month’s Rent.
Here’s an example. Let’s say your property rents for $2,000 per month, and prior to move-in, you’re going to require:
First month’s rent ($2,000)
Last month’s rent ($2,000)
Security deposit ($1,000 max)
That’s a total of $5,000 prior to move-in that you’ll want to collect from your tenant. The $2,000 for the first month’s rent can be deposited into your own account right away. It’s their first rental payment. What do you do with the remaining funds, however? How do you handle the security deposit, and where do you deposit the last month’s rent, which you have to hold until that final month of the tenancy?
Let’s start with the security deposit. According to Portland and Oregon laws, you must allow your tenant to pay any security deposit in installments over a period of up to three months. Your tenants will make a reasonable request and you will need to accept it.
Holding Rent in Escrow
The last month of rent cannot be used by you. At least not yet.
Within two weeks of receiving the tenant’s money that covers the last month of rent, you are required to deposit the funds into an account that’s separate from your personal account and even separate from your business operating account. This will be a separate escrow account that specifically holds the security deposit and/or the last month’s rent.
If you choose to hold the money in an interest-bearing account, all interest shall accrue proportionately to the benefit of your tenant. You cannot make a claim to the interest that was earned; it must be returned to the tenant with any remaining security deposit to which they are entitled. When the account bears interest, you’ll have to pay such interest in full, although the law does allow you to deduct five percent to cover administrative costs. If the claims you make for damage exceed what was paid in a security deposit, you can use the interest to pay for the damage.
Include the name and address of the financial institution at which the security deposit and the last month of rent is held in the lease agreement.
Withholding Funds for Repairs and Replacements
The money you’ve collected to pay for the last month’s rent cannot be used for repairs and damage, even if it’s damage that was caused by the tenant. Your payment for the last month of rent must go towards that, even though it’s considered part of the security deposit when you collect the funds.
The security deposit funds, however, can be applied to any repairs and replacements that are considered damage. You cannot use the security deposit to cover the cost of repairing normal wear and tear, however, nor can you charge the tenant’s deposit to paint the interior of the property, unless specific damage was caused to the paint by the tenant or if the tenant painted the walls without permission.
Covering Unpaid Rent with Prepaid Rent
Prepaid rent can be defined as any payment required by the landlord for a monthly or weekly rent obligation that is not yet due. It is often referred to as the “last month's rent,” and when you charge your tenants the last month of rent before they move in, you can apply that payment to the last month of rent. However, if your tenants move out owing rent, you can take what is owed out of that prepaid rental amount, which you are holding in a separate account.
When you use the prepaid rent to pay for rent that is overdue, you’ll need to provide your tenants with the balance of their prepaid rent and a written explanation of what was withheld and why. This notice needs to go out to your tenants within 31 days of them moving out. You cannot apply that prepaid rent towards anything except for unpaid rent. If you wrongfully keep that money, tenants can file a lawsuit against you for up to twice the amount of money that was paid.
When Can a Tenant Withhold Rent?
Tenants in Portland do not actually have the right to withhold rent.
However, when their landlords fail to comply with a term of the lease or rental agreement, or when the landlord fails to maintain the rental home in a condition that’s safe and habitable, there’s a process for tenants to follow when they want to withhold rent.
They’re responsible for notifying you, the landlord, of the problem. Whether it’s a breach of the landlord's responsibilities outlined in the lease agreement or a refusal to make a repair that keeps the property habitable, tenants will need to put something in writing to the landlord and provide a 30-day notice to terminate the lease agreement if the landlord does not make the necessary repairs or adjustments.
Tenants do have the right to withhold rent for some of the minor defects that may have been flagged but not repaired. The amount that can be withheld may not exceed $300.
You never want to get to the point with your Portland rental property or your Portland tenants that rent needs to be withheld. If the tenants have made a maintenance request, make sure you take care of the problem quickly. It’s better for your tenant relationship and it’s better for the condition of your property.
Portland Property Management as a Partner in Compliance
Oregon has some extremely tenant-friendly laws. Portland goes even further with a lot of the tenant protections that are currently in place. Additional legislation is always being discussed, and you can expect that the law will always be changing, making the leasing, management, and maintenance of your Portland investment properties even more complex. It’s very easy to make a mistake, and that mistake will almost always be an expensive one to correct.
Whether we’re talking about tenants withholding rent because repairs were not made or disputes over the security deposit, a property management company in Portland can help you avoid the common types of mistakes and conflicts that are bound to surface while you’re renting out a property in this market.
If you’re confused about how much money to collect when a tenant moves in, and where you should keep those funds, we can help you make the right decision. Your property management partner will ensure that you’re protected and your investment property, too. We’ll keep you compliant.
Other potential pitfalls include misunderstanding the rent control laws, forgetting what you can and cannot consider while screening applicants and stumbling over fair housing requirements. In Portland, you must allow your tenants to pay their security deposit in installments, even if all of your common sense says that this does not seem appropriate or safe. You must also limit what you collect in a security deposit, especially when you’re collecting the last month’s rent as well as the first month’s rent. You have to know exactly where to hold that money, and why it matters.
This is why we’re here. To support and serve owners like you who might feel a bit perplexed by the laws and requirements in Portland and throughout Oregon. Contact us at PropM, Inc. if you have any questions at all.