Provision of security

A security deposit is a contractually agreed form of security whereby one party deposits money, securities, or a bank guarantee to ensure the proper fulfillment of its obligations. In the real estate sector, it is most commonly encountered as a security deposit for rent, as a contractor’s security under the law governing contracts for work and services, or as a deduction from the contractor’s fee in a developer-purchased property transaction. It protects the entitled party from financial loss in the event of non-performance.

Security Deposits in Tenancy Law: The Rental Security Deposit

The most common form of security deposit in everyday real estate transactions is the rental security deposit. According to Section 551 of the German Civil Code (BGB), the security deposit may not exceed three months’ net rent excluding utilities. The landlord must hold it separately from their own assets-usually in a security deposit account. After the tenancy ends, the landlord has a reasonable period to settle the security deposit; in practice, three to six months is standard. We often see security deposits being wrongfully withheld-tenants should be aware of their rights.

The tenant may pay the security deposit in three equal monthly installments, with the first installment due at the start of the tenancy. A frequently overlooked point: The landlord must invest the security deposit in an interest-bearing account-the interest earned belongs to the tenant and is taken into account upon repayment. Landlords who park the security deposit in a non-interest-bearing account are in violation of § 551(3) of the German Civil Code (BGB). With interest rates currently at 2-3% p.a. on money market accounts, this point is quite relevant for multi-year tenancies and high security deposits.

Security Deposits in Construction Law: Sections 648a BGB and MaBV

Under the law governing contracts for work and services, the client may, pursuant to Section 650f BGB, require the contractor to provide a security deposit to ensure the timely completion of the work. Conversely, the retention of a portion of the contract price-often 5% for the duration of the warranty period-protects the client against claims for defects. In real estate development projects, the MaBV (Real Estate Brokerage and Development Ordinance) precisely regulates what security the developer must provide before payments from the buyer may be made.

The security retention in real estate development purchases works as follows: The final installment of the purchase price (usually 3-5%) becomes due only after defect-free acceptance. The buyer can use this amount as leverage to persuade the developer to make repairs. Pursuant to Section 641(3) of the German Civil Code (BGB), the purchaser may even withhold double the cost of remedying the defects-that is, retain up to €10,000 if the estimated cost of remedying the defects is €5,000. This leverage should be used deliberately and strategically.

Overview of Types of Security Deposits

Security deposits can be provided in various forms: as a cash deposit (bank transfer to an escrow account), as a bank guarantee (the bank steps in if the tenant defaults), as a pledge of securities, or as a tenant deposit in the form of a savings account. Guarantees are often attractive to tenants because no capital is tied up; for landlords, however, they are less secure than a cash deposit, as the bank first assesses the burden of proof in the event of a dispute. Landlords should therefore insist on a directly enforceable guarantee.

The completion guarantee in a developer purchase is a special form of security: It protects the buyer in the event of the developer’s insolvency. The guarantor-typically a bank or insurance company-steps in and ensures that the building is completed or the purchase price is refunded. We recommend always insisting on a completion guarantee when purchasing from a developer, even if this slightly increases the purchase price.

Security Deposits in Commercial Leases

Different rules apply in commercial lease law than in residential lease law. The limit of three months’ rent under Section 551 of the German Civil Code (BGB) does not apply there-here, security deposits of six or more months’ rent, bank guarantees, or group-wide letters of comfort are common. Commercial landlords also have greater flexibility regarding billing periods and the intended use of the security deposit. We recommend always having commercial lease agreements reviewed by an attorney with regard to security deposits, as the range of possible arrangements is considerable.

Practical Tip for Property Owners in Nuremberg and Franconia

In the Nuremberg rental market, a three-month cash security deposit is standard. Landlords should deposit the security deposit in a separate escrow account and credit the interest earned to the tenant-otherwise, fines may be imposed. When selling a rented property in Franconia, the security deposit obligation automatically transfers to the new owner; we recommend requesting written proof of the security deposit balance at the time of handover.

We also advise Nuremberg landlords to set up the security deposit account correctly immediately upon signing the lease and to provide the tenant with a confirmation. This prevents disputes later in the tenancy and protects against liability risks. When managing multiple units, we recommend maintaining a separate security deposit account for each apartment-mixing funds is not permitted.

Frequently Asked Questions

Can a Nuremberg landlord require a security deposit of more than three months’ rent?

No. Section 551 of the German Civil Code (BGB) limits the security deposit nationwide to a maximum of three months’ net rent excluding utilities. Agreements requiring more are invalid in this respect-the tenant can reclaim the excess amount.

What happens to the security deposit when a house is sold?

The new owner assumes the security deposit obligation by law (§ 566a BGB). Tenants must be informed of the change in ownership; the security deposit must be transferred from the seller to the buyer or offset.

How long can the developer retain a security deposit?

The standard security deposit of 5% of the contract price remains in effect until the end of the warranty period-typically five years for a building. The contractor may demand that it be replaced by a bank guarantee (Section 650f of the German Civil Code).

Can the landlord use the security deposit for damages before the lease ends?

Generally, no-the security deposit serves as security after the lease has ended. During the term of the lease, the landlord may only use the security deposit under very strict conditions: for example, in the case of a claim that has already been decided by a final court ruling and is indisputably established. Normally, the security deposit must remain intact until the final settlement after the lease ends. Unilateral access to the security deposit during the lease gives the tenant the right to have the deposit replenished or to offset it against the next rent payment.

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