Get Signed Agreement When Taking Deposits from Applicants

Reduce the risk of a lawsuit based on an application misunderstanding.

Requiring application deposits for tax credit units is a good way to secure applicants and get signed leases later on, especially when new or substantially rehabilitated buildings aren’t ready. But when you accept a deposit, don’t inadvertently give the applicant the impression that you’re guaranteeing him a unit. Giving the impression that the deposit is a guarantee may lead to legal disputes if the applicant’s circumstances change and he’s no longer eligible when the unit is ready.

To help you avoid lawsuits from misunderstandings about application deposits, we’ve created Model Agreement: Set Terms for Application Deposit, which, with your lawyer’s approval, you can adapt for use at your site.

Eligibility May Change

When you get applications, you review them to see if applicants appear to meet your tax credit program’s eligibility requirements. If applicants qualify, you place them on your waiting list. Many tax credit sites also accept application deposits to reserve units. But applicants who appear to be eligible and put down deposits for units may not be eligible later, when they reach the top of the waiting list or when construction or renovations are complete.

• The household size, income, or other factors may have changed by the time you’re ready to admit the applicant. For instance, an applicant on the waiting list may get a pay raise that puts her above the income eligibility limit for your site.
• The applicant may not pass your screening process. For example, landlord references or credit reports may be unsatisfactory, and employment or other household data may not check out.

You’ll open the door to needless lawsuits and fair housing complaints, unless you make it clear to applicants that even though you’re accepting deposits from them, you must still later complete the certification and screening processes when their units become available.

What to Say in Agreement

To avoid legal battles with applicants, get each applicant who puts down a deposit on a unit to sign an agreement acknowledging that his eligibility may change and he may not get the unit. Your agreement, like ours, should cover the following points:

Applicant appears to be eligible, but application may need updating. Your agreement should inform the applicant that, based on the information currently in your files, he appears to be eligible for admission to your site. Tell him that you’ve placed him on your waiting list but that when a unit becomes available, you may have to conduct another review of his eligibility.

If the applicant asks why, you can say the IRS rules specify that certain information he has given you such as employment and salary data is good for only 90 days. Stress that you could reject the application based on the information you get in that review.

Applicant is receiving only an estimate of when a unit will be available. Emphasize that this is only an estimate based on, for example, the pace of construction or renovation.

Application processing fee (if any) is nonrefundable. In 2009, the IRS ruled that application fees “may not exceed the actual out-of-pocket costs incurred by the site for checking a prospective tenant’s income, credit history, and landlord references.” In other words, one-time fees charged at the time of application aren’t considered rent. So, unlike managers in other subsidized housing programs, LIHTC site managers may charge application fees and/or credit check fees.

However, only the amount the owner incurs for processing the application may be charged to the prospective tenant. The owner can’t make a profit from the processing fees charged to tax credit applicants.

If you require an applicant to pay an application processing fee, be sure to distinguish this fee from the application deposit. A court may force you to refund the processing fee unless the deposit agreement specifically deems it nonrefundable.

What the application deposit covers. Applicants may think that the application deposit guarantees them a lease. They may also confuse the application deposit with a security deposit. The security deposit has nothing to do with the application process; the security deposit covers possible damage to the unit beyond ordinary wear and tear. Therefore, your agreement should clearly spell out that the application deposit is in exchange only for management’s agreement to take a particular unit off the market, for instance, while construction is being completed and the applicant’s application is being considered. Explain that, depending on the circumstances, the deposit will either be refunded, credited toward the security deposit if a lease for the unit is signed, or retained by management as “liquidated damages,” an amount the applicant agrees to pay the management to cover management’s costs and expenses in taking the unit off the market.

Applicant must update information as soon as it changes. Applicants don’t belong on your waiting list if they’re no longer eligible to live at your site. And there may be other applicants who are still eligible but belong on the waiting list for another size apartment. To keep your waiting list under control, require the applicant to notify you immediately if his household size or income changes. And, so you can stay in touch, require the applicant to notify you if he moves or gets a new telephone number. If an applicant’s change in circumstance renders him ineligible, promptly refund his application deposit and remove him from the waiting list.

What happens to deposit if application is rejected or withdrawn, or applicant doesn’t sign lease. To further eliminate the possibility of applicant confusion, a good agreement tells the applicant what happens to his deposit in each of the following situations:

• If you reject him: application deposit refunded;
• If he withdraws the application: application deposit kept by management;
• If he fails to provide complete information, including updates, required for certification: application deposit kept by management; or
• If he fails to sign the lease after he’s approved: application deposit kept by management.

To make things completely transparent for the applicant, it’s a good idea to let the applicant review the lease before putting down a deposit and attach a copy of the lease to the deposit agreement. Some managers wait until a unit is ready before discussing lease terms with the applicant. But if the applicant balks at a lease term later, it could result in a vacant unit and a refunded application deposit.

Deposit agreement isn’t agreement to lease. Add a paragraph emphasizing that the agreement is preliminary only and doesn’t obligate management to execute a lease or deliver possession.

How notice will be given. Tell the applicant you’ll notify him of your decision either by phone or letter. Make clear that notice to a spouse or any co-applicant counts as notice to all applicants in a household.

Acknowledgment of monies received; signatures. State exactly how much money and when the money was received. Also, an agreement must be signed to be legally enforceable, so make sure the applicant and a representative from your office or the owner’s office sign it.