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Good Faith Deposit vs Security Deposit

· Rental

Renting A Property

What To Take Note

The Good Faith Deposit and the Security Deposit are often mistaken with one another. This guide aims to set out their differences. Both are intricately related to the Letter of Intent and Tenancy Agreement respectively. 

As lined out in the rental timeline, you, as a tenant, will throughout the rental procedure sign and exchange two files: the Letter of intent (LOI) (common practise), and the Tenancy Agreement (TA) (obligatory). Each comes accompanied with a financial deposit. The Letter of Intent goes hand in hand with the Good Faith Deposit, whereas the Tenancy Agreement goes together with the security deposit. 

Difference I

The Good Faith Deposit serves the purpose of credibly, and financially underscoring your intentions to venture into a rental scheme with the landlord. The security deposit additionally functions as compensation for the landlord in case the tenant damages the property due to negligence, or as a refund should the tenant terminate the lease prematurely. Both deposits generally comprise one month’s rent for a one year lease, and double for two year’s lease. 

Difference II

The Good Faith Deposit only serves its purpose for a couple of days. Upon the signing of the TA it is converted either into the security deposit or a rental advance. The security deposit on the other hand will last until the termination of the lease, and shall at that point be returned to the tenant given there is no reason (damages have been done or lease is prematurely terminated) to withhold it. 

Seeing that the security deposit lifetime is significantly lengthier, there will be the added consideration of interest. Commonly, the security deposit is returned at the end of the lease without an added interest payment. There will usually be a clause in the Tenancy Agreement stipulating the conditions surrounding interest payments. In the larger scheme of things, the loss in real value over one or two years will generally be limited and this is probably not a point of contention. 

Difference III

While there are some additional differences they are generally inferable from the first two differences as outlined above. Apart from differences in purpose and lifespan, the Security Deposit also differs in that it is stated in both the Letter of Intent and the Tenancy Agreement, whereas the Good Faith Deposit should only be detailed in the Letter of Intent. 

As noted previously, the Letter of Intent is not obligatory whereas the Tenancy Agreement is. If the Letter of Intent as an intermediary procedure is skipped, then naturally the Good Faith Deposit is skipped also.

On a final, yet important note, both the Good Faith Deposit and the Security Deposit ought to be conditioned; the security deposit in both the Letter of Intent and Tenancy Agreement, and the Good Faith Deposit solely in the Letter of Intent. This means that a clause ought to be included stipulating precisely under what conditions either deposit is forfeited or refunded.

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