What Is a Rental Escrow Account?

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A rental escrow account is a specific type of bank account established by court order, order of a local municipality or agreement between a property owner and a tenant. The tenant pays the monthly property rent into the rental escrow account. The property owner can then use the funds for specific reasons designated prior to establishing the rental escrow account.

Housing Code Compliance

The main purpose of a rental escrow account is to ensure the owner of the property complies with health and safety codes associated with the leased property. The rent you pay for the property goes into the escrow account. The owner of the property then receives notification from the clerk’s office that you have paid the rent. The clerk’s office then allows the owner of the property to use the money in the escrow account toward the cost of maintenance and repairs on the property. The fact that the account is managed by the local municipality's clerk’s office allows the municipality to supervise actions related to housing code compliance.

Lease to Own

Rental escrow accounts also facilitate the transfer of property related to a lease purchase, also known as rent to own or lease to own. With lease purchase transactions, the rental escrow account functions by facilitating the transfer of the property per the terms set forth in the lease-to-own contract. In this case, you deposit your rent money into the escrow account. The owner of the property would receive the funds at the time of the transfer of property ownership.

Order of Compliance

When a municipality's compliance office orders a rental escrow account, the municipality wants to ensure that the owner of the property pays for the maintenance and repairs required to bring the property up to code. Generally, the municipality will only require a rental escrow account after the owner of the property shows a history of failing to meet health and safety standards, or in cases where the tenant has successfully sued for enforcement of code violations. In order to ensure that the property maintains a safe living environment, the building inspector has the authority to order the owner to make necessary repairs to the property.

Setting Up a Rental Escrow Account

Any time a court orders a property to establish a rental escrow account to ensure compliance, the property owner must fulfill all the ordered obligations to the standards of the court that issued the order. When a tenant requests a rental escrow account, he must present the expired inspector’s order to the court and prove that the owner of the property did not fulfill the order. The court administrator will typically collect a small administration fee from the tenant and help the tenant complete the petition process. The court then schedules a hearing and can issue the order for the rental escrow account.

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References

  • "Real Estate Principles"; Charles Floyd and Marcus Allen; 2002
  • "Principles of Real Estate Finance"; Charles Long; 2010
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