German Rental Security Law in a nutshell

Many American personnel live off-post in rented quarters. The landlords almost always require payment of a security deposit. Under German law, landlords may ask for a deposit not to exceed three-months’ net rent. However, the tenant has the right to make the rental security deposit payments over a three-month period in three equal monthly shares.

The landlord has to keep the rental security deposit apart from his other assets and has to deposit it with a banking institution at the usual rate of interest for savings deposits with withdrawal notice of three months (§ 551 para. 3 BGB, German Civil Code). The interest drawn by the deposit accrues to the tenant annually and increases the rental security deposit. However, what happens when the bank does not offer any interest but charges a deposit fee, effectively negative interest, and thus reducing the amount paid in rental security?

The answer depends on the market situation, i.e., whether negative interest has become customary. As long as there are banks that do not charge a negative interest, the landlord will have to switch the account to a corresponding bank in order to comply with his statutory obligation to keep the rental security deposit in an interest accruing account.

The purpose of the rental security is to cover the landlord for potential damages if the tenant fails to fulfil his obligations under the lease. Therefore, the landlord has an interest of his own to sustain the amount and to have it increased over time by accruing interest although he merely holds the money in escrow as it still belongs to the tenant. Likewise the tenant does not want to see his money diminished for the tenant is responsible to keep the rental security deposit at the agreed upon amount. If negative interest cannot be avoided, the tenant will be under an obligation to fill up the account to the agreed upon amount of rental security.

The tenant also has to bear the bank charges associated with maintenance and closing the account. To avoid the aforementioned fees and risks, the landlord and the tenant could mutually agree, instead of paying the rental security deposit into an escrow account, to allow the tenant to present a bank guarantee to the landlord.

A tenant is entitled to a return of the deposit only after the premises have been turned back to the landlord. And while the landlord has to be afforded a reasonable period of time for the return the security deposit – usually 6 to 12 months – the moving-out protocol should help to speed up this process and lead to at least a partial repayment of the rental security deposit; interest remains accruing on the portion still withhold. It is recommend putting a clause in the rental agreement specifying the terms of return/settlement.

If the premises have been sold, the new owner/landlord has to pay back the rental security deposit to the tenant, even if the former owner/landlord did not transfer it to him/her. In any case, the former owner remains liable as a secondary debtor if the tenant cannot obtain the rental security deposit from the new owner/landlord.

Finally note, a tenant may not set off the rental security deposit against any rent payments due, unless the landlord agrees to it. An exception applies where the landlord — despite the tenant’s request – fails to demonstrate his compliance with the statutory or contractual rental security rules. Before taking such action, the tenant should obtain legal advice.