Why larger security deposits are better for both landlords and tenants.

I encounter many leases where the landlord only requires a one month security deposit. This is usually done because many tenants can’t afford to deposit more. In many cases, having a 2 – 4 month security deposit is going to be best for both parties. Why would a tenant want to put forth more than 1 month of rent? The answer is that it will result in them being less likely sued in the event of an early termination.

While a tenant/guarantor may be liable under the lease for the entirety of rent remaining on the term, landlords have a duty to mitigate. A judgment for such a large amount is unlikely prior to the expenditure of reasonable mitigation efforts. The cost of using a litigator is likely to exceed the rent lost between the tenant’s departure and a new tenant assuming occupancy. Enforcing a judgment is a completely different matter that takes additional time, energy, and expense. In the event of a monetary default, it’s also unlikely that a tenant will have the ability to pay the judgment. Regardless, if a tenant gets sued, they’ll likely lawyer-up, expending money of their own. In the end, the result unsatisfactory to everyone. All said, this approach is usually not practical.

The best way to avoid a lawsuit is to have a practical method that reduces near-term costs incurred by a Landlord.
In the event of an early termination, the landlord is going to incur costs for time the premises is vacant, costs for the time for any work that needs to be done for the premises to fit the intended use of the new tenant, costs of work performed on behalf of the tenant, and costs for additional brokerage commissions that need to be paid to brokers on the new deal.

If the security deposit covers these vacancy/re-leasing expenses, it is unlikely that a landlord will desire to pursue litigation. If reasonably marketed, it is likely that a premises will be re-occupied within two months. A higher security deposit is a practical means of avoiding loss and mitigating expensive litigation.