Are Good Faith Deposits Legal in NYC? Rentals vs. Sales

A good faith deposit in NYC is illegal if you’re renting and standard practice if you’re buying. State law bars landlords and their agents from collecting any pre-lease deposit, holding fee, or reservation payment from a prospective tenant, with one narrow exception for a background check. Buyers purchasing a home, by contrast, routinely put down about 10 percent of the purchase price as earnest money when they sign the contract of sale. Which rules apply to you depends entirely on which side of that line you’re on.

Why Pre-Lease Deposits Are Illegal for NYC Renters

Real Property Law § 238-a makes it unlawful for a landlord or their agent to collect any deposit, fee, or advance payment from a prospective tenant before a lease is signed.1New York State Senate. New York Real Property Law RPP 238-A – Limitation on Fees The label on the payment doesn’t change the analysis. “Good faith deposit,” “holding fee,” “reservation deposit,” “commitment fee” — all prohibited. The landlord cannot take your money until you have a signed lease.

The restriction covers traditional apartments, co-op rentals, condo rentals, and any other residential lease where a landlord-tenant relationship exists. It applies to the landlord’s broker as well as the landlord.

The One Legal Pre-Lease Charge

A landlord may charge a fee to cover the actual cost of a background and credit check, capped at $20. Anything above that amount violates the statute.1New York State Senate. New York Real Property Law RPP 238-A – Limitation on Fees

A few conditions attach to that fee:

  • If you already have a background or credit report from the past 30 days, the landlord must accept it and cannot charge you for a new one.
  • The landlord must give you a copy of any report they obtain.
  • You must receive a written receipt showing the date, the amount paid, and the name of the company that ran the check.

If a landlord asks for more than $20, refuses to provide a receipt, or won’t accept a current report you already have, treat it as a warning sign. The screening fee is meant to reimburse an actual cost, not to function as a deposit by another name.

Security Deposits After You Sign

Once a lease is signed, the landlord can collect a security deposit, but it cannot exceed one month’s rent. The landlord also cannot collect both a security deposit and an advance payment of last month’s rent. If your rent is $2,500, the deposit maximum is $2,500.2New York State Senate. New York General Obligations Law 7-108

When you move out, the landlord has 14 days to return the deposit with an itemized statement of any deductions. Miss that window and the landlord forfeits the right to keep any portion of the deposit, even if there was legitimate damage.2New York State Senate. New York General Obligations Law 7-108 The same 14-day deadline and itemization requirement apply to rent-stabilized apartments.3Rent Guidelines Board. Security Deposits FAQs

Getting Back a Deposit a Landlord Shouldn’t Have Taken

If you’ve already paid a pre-lease deposit, start with a written demand letter. Identify the payment, state that it was collected in violation of Real Property Law § 238-a, and ask for a full refund. Keep it short and factual. Many landlords refund at this stage rather than escalate.

If the demand is ignored, two paths are open to you:

Documentation is what makes these cases straightforward. Save every message with the landlord or broker, screenshot the listing if it mentioned a deposit, and keep a copy of your demand letter and any response.

Good Faith Deposits in Home Purchases

The rules invert when you’re buying. Good faith deposits, usually called earnest money or contract deposits, are legal, expected, and nearly universal in NYC residential sales. The customary amount is 10 percent of the purchase price, paid when you sign the contract of sale. On a $750,000 apartment, that is a $75,000 check at contract signing.

The money does not go to the seller. It is held in an escrow account, typically maintained by the seller’s attorney, and stays there until closing, when it is credited toward the purchase price. The escrow arrangement protects both sides: the seller can’t spend the funds before the deal closes, and the contract spells out when the money is released and when it is forfeited.

If a buyer walks away without a valid contractual reason, the seller generally keeps the full deposit as liquidated damages. The deposit amount, the conditions for return, and the escrow terms are all negotiable, but once the contract is signed, those terms govern.

Contingencies That Protect Your Sales Deposit

Contingency clauses are what give a buyer a legitimate exit. They aren’t automatic; they have to be written into the contract, and each has its own deadline.

  • Mortgage contingency. The most common protection for NYC buyers. If you can’t secure a mortgage commitment within the window specified in the contract, often 60 to 180 days, either party can cancel and the deposit is returned. The buyer typically must notify the seller in writing before the deadline.
  • Inspection contingency. Lets the buyer cancel after the home inspection if serious problems surface. The buyer usually has broad discretion before the inspection deadline, but missing that deadline can mean losing the right to back out.
  • Title contingency. If the seller cannot deliver clear, marketable title because of liens, boundary disputes, or similar defects, the buyer is entitled to a full refund of the deposit.

Waiving contingencies to strengthen an offer is common in competitive markets and genuinely risky. A buyer who waives the mortgage contingency and then can’t secure financing has no contractual basis to recover the deposit. On a $750,000 purchase, that’s $75,000 lost because of a decision made under pressure. A real estate attorney reviewing the contract before you sign is where that risk gets managed.