Our Legal Hotline often gets calls about handling funds accompanying rental applications. This article will address the most common issues.

The answers to these questions assume that:
• this is a residential real estate transaction,
• the NVAR Rental Application is used, and
• the brokerage firm does not conduct property management; it only handles leasing.

In a typical lease transaction, Applicants deliver to the Listing Broker a Rental Application accompanied by two checks: one check for the Processing Fee, and one check for the Earnest Money Deposit (EMD). Sometimes Applicants will also submit with their application a check for the security deposit.

Handling of EMDs, security deposits, and escrow funds in a real estate transaction is governed in part by the Virginia Administrative Code (18VAC135-20-180), and in part by agreement between the parties.

Q: What is the purpose of the Processing Fee and how should it be handled?
A: The Processing Fee is typically a check payable to the Listing Broker to perform a credit check on the Applicants. Since this is a fee paid to the Listing Broker for the purpose of performing a credit check, the Listing Broker is entitled to that fee and can deposit it directly in the Listing Broker’s Operating Account.

Q: How should the Earnest Money Deposit EMD be handled?
The EMD is customarily equivalent to the first month’s rent.
A: If the check is payable to the Broker:
Until a lease is signed, the EMD belongs to the Applicants, therefore these funds must be deposited in the escrow account. According to the NVAR Rental Application, the Listing Broker must deposit the EMD in the escrow account “no later than 5 business banking days after [the Rental] Application has been approved.”

After EMD funds are deposited in the Escrow Account, neither the Landlord, nor the Listing Broker is entitled to these funds until the lease is signed. When the lease is signed, the Landlord becomes entitled to the EMD. Then, by virtue of the Listing Agreement, the Listing Broker is authorized to disburse the funds according to the Listing Agreement terms. The Listing Broker may transfer the portion of the EMD earned as commission (Listing Broker and Leasing Broker commissions) to the Listing Broker’s Operations Account, and, if the EMD is larger than the earned commission, refund the Landlord the EMD balance directly from the escrow account.

If a lease is not signed, then the EMD should be returned to the Applicants, unless the application specifically provides otherwise.

If the check is payable to the Landlord:
The EMD may be deposited by the Landlord in an escrow account, but it may not be used by the Landlord until a lease is signed. If a lease is not signed, the EMD must be returned to the Applicants, unless the application specifically provides otherwise.

In accordance with the NVAR Rental Application, the Landlord is not entitled to the EMD simply by accepting the tenants’ application. The Landlord becomes entitled to the funds when the lease is signed. 

Q: How should the security deposit be handled?
A: If the check is payable to the Broker:
Until a lease is signed, the security deposit belongs to the Applicants, therefore these funds must be placed in an escrow account. According to Virginia Administrative Code 18VAC135-20-180 (B)(1)(b), the Listing Broker must place the security deposit “in an escrow account by the end of the fifth business banking day following receipt, unless otherwise agreed to in writing by the principals to the transaction.”

Funds designated as security deposit cannot be used by the Listing Broker for payment of commissions or other fees. When the lease is signed, the Landlord becomes entitled to the security deposit, and the Listing Broker must release the security deposit to the Landlord.
If a lease is not signed, then the security deposit should be returned to the Applicants.

If the check is payable to the Landlord:
The security deposit should not be deposited until a lease is signed, and if a lease is not signed, the security deposit check must be returned to the Applicants.

Theo Theologis is a law clerk for NVAR