Effective October 1, 2004, the amount of interest a landlord must pay a residential tenant in Maryland upon return of the tenant’s security deposit has been altered from 4% to 3% per annum.

Generally, under the prior law a landlord was required to pay 4% simple interest, accruing at six-month intervals, on a tenant’s security deposit and to maintain all security deposits in branches of federally-insured financial institutions doing business in Maryland. The deposits must be in interest-bearing accounts, and the accounts must be devoted exclusively to security deposits. In lieu of these accounts, a landlord may hold the security deposits in insured certificates of deposit at branches of federally-insured financial institutions doing business in Maryland or in securities issued by the federal government or the State.

By way of background, in 1973, Maryland imposed the duty on a landlord to pay interest on a tenant’s security deposit at 3% simple interest, accruing at six-month intervals. In 1980, the General Assembly increased the interest rate that must be paid on a security deposit from 3% to 4%.

This year’s change was largely driven by the fact that interest rates in 2004 for both passbook accounts and certificates of deposit are below 4%. The current interest rate paid on most passbook accounts is less than 1%, and the interest rates for short-term certificates of deposit currently range from 1.25% to 2.25%, with a slightly higher yield. Because all of these rates are lower than the 4% required under Maryland law, landlords will benefit from this enactment.

It is curious that similar legislation was introduced and rejected by the General Assembly in the 2003, 2002, 2000, and 1997 sessions.

This year, HB 723, alters the amount of interest a landlord must pay a residential tenant upon return of the tenant’s security deposit from 4% to 3% per annum. However, should a lease expressly provide interest is to be paid at 4%, interest must, of course, be paid at that rate until the lease expires.

Landlords should review their leases and cause the security deposit provision to be modified, now, to dovetail current Maryland law, including providing that interest will be paid “at the legal rate” versus a specific stated rate.

The source for much of the information in this article was the Department of Legislative Services.