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

In New York City, good faith deposits are illegal for rentals and legal for home purchases. Since 2019, state law has barred landlords and their agents from collecting any pre-lease payment from a prospective tenant, whatever it’s called. Buyers, by contrast, routinely put down around 10 percent of the purchase price as earnest money when they sign a contract of sale. Which set of rules applies to you depends on whether you’re signing a lease or buying property.

The Rental Ban Under Real Property Law § 238-a

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 matter. Good faith deposit, holding fee, reservation deposit, commitment fee, apartment hold — all of them fall under the same rule. If you haven’t signed a lease, the landlord cannot legally take your money.

The ban covers traditional apartments, co-op rentals, condo rentals, and any other residential arrangement that creates a landlord-tenant relationship. It applies to brokers acting on the landlord’s behalf as well as to landlords themselves.

The One Legal Pre-Lease Charge

State law carves out a single narrow exception: a fee to cover the actual cost of a background check and credit check, capped at $20.1New York State Senate. New York Real Property Law RPP 238-A – Limitation on Fees Anything above $20 violates the statute.

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 screening company.

A landlord asking for more than $20, or refusing to provide a receipt, is off-side of the law. The screening fee exists to reimburse an actual cost, not to function as a disguised deposit.

What to Do If You Already Paid

If you’ve handed over money that state law didn’t allow the landlord to collect, start with a written demand letter to the landlord or management company. Identify the payment, cite Real Property Law § 238-a, and ask for a full refund. Keep it short and factual. Many landlords return the money at this stage rather than deal with a formal complaint.

If that doesn’t work, two options are open to you:

Bring your bank statements, copies of any checks, texts or emails discussing the payment, and evidence that no lease was signed. Screenshot any listing that referenced a deposit. When the paper trail is clear and no lease exists, the case is straightforward.

Security Deposits After You Sign

Once you actually sign a lease, the landlord can collect a security deposit, but it cannot exceed one month’s rent. They also cannot collect both a security deposit and an advance payment of last month’s rent.5New York State Senate. New York General Obligations Law 7-108 On a $2,500 lease, the ceiling is $2,500.

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.5New York State Senate. New York General Obligations Law 7-108

Good Faith Deposits in Home Purchases

The rules flip when you’re buying rather than renting. Good faith deposits, usually called earnest money or contract deposits, are legal, expected, and nearly universal in NYC home purchases. In most transactions the buyer puts down about 10 percent of the purchase price when signing the contract of sale. On a $750,000 apartment, that’s a $75,000 check written well before closing.

The money does not go to the seller. It sits in an escrow account, typically maintained by the seller’s attorney, until closing, at which point it’s 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’s forfeited.

If the buyer walks away without a valid contractual reason, the seller generally keeps the whole deposit as liquidated damages. Everything about the deposit — amount, refund conditions, escrow terms — is negotiable, so the contract language is what actually governs the money.

Contingencies That Protect a Buyer’s Deposit

A well-drafted purchase contract includes contingencies that let a buyer cancel and recover the deposit under specific circumstances. These protections aren’t automatic. Each one has 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 time set in the contract (often 60 to 180 days), either party can cancel and the deposit comes back. You have to notify the seller in writing before the deadline.
  • Inspection contingency. Gives the buyer an out if the home inspection turns up serious problems. Discretion is usually broad, but missing the deadline can wipe out the right to back out.
  • Title contingency. If the seller can’t deliver clear, marketable title because of liens, boundary disputes, or other defects, the buyer gets the deposit back.

Waiving contingencies to sharpen an offer is common in tight markets and it’s a real gamble. A buyer who waives the mortgage contingency and then can’t secure financing has no contractual basis for a refund. That’s $75,000 gone because of a decision made under competitive pressure. Having a real estate attorney review the contract before signing is where these decisions get made carefully.