Security deposits are trust funds which are used by the landlord to pay for damages to the apartment and to cover non-payment of rent. However, a tenant who causes damages or does not pay rent is entitled to the return of his or her security deposit if the landlord does not comply with the following requirements of the Security Deposit Law, according to a recent New York County Civil Court case.

First, landlords may not combine security deposit funds with their personal accounts. Combining or commingling of a security deposit with a landlord's personal funds is considered a form of theft or conversion that requires the landlord to immediately return the funds to the tenant. The security deposit plus interest earned are the tenant's property and must be held in trust by the landlord. The tenant must report on his individual income tax return the gross amount of interest earned on his security deposit during the calendar year even though he may not actually receive the interest.

Second, the landlord must provide the tenant with a separate written notice of the name and address of the bank, account number and the deposit amount.

Third, landlords must respond when tenants seek information regarding the status of their security deposits, eg. account history.

Collecting a security deposit from the tenant is an absolute necessity because lawsuits against tenants for property damage and unpaid rent are very costly. The tenant may be "judgment proof" and the landlord does not have a right to seize the tenant's property or obtain a lien for unpaid rent. The security deposit should be collected before the tenant is given the apartment keys. When the tenant moves out, the landlord should provide the tenant with an itemization of all deductions that are made from the security deposit.