Can a Bank Close an Escrow Landlord Tenant Account?

When a person rents a space from a landlord, the landlord will often require that the tenant provide a security deposit. This security deposit will be held by the landlord as collateral in the event that the tenant causes damage to the landlord's property. Often, this money will be held in an escrow account. A bank can close this account, but only with proper justification.

Escrow Account

Many states require that a landlord hold a tenant's security deposit in an escrow account. In some cases, if the state requires that the landlord pay the tenant interest accrued from the account, then the account will be an interest-bearing one and payments may be made to the tenant. Exactly how the account will be set up will depend on state laws and bank policies, but the account is maintained by the bank under conditions agreed to by both the landlord and the tenant.

Account Closure

A bank can close any account it wishes, but only with just cause that accords with the terms of the contract that the landlord and the tenant signed when opening the account. Bank generally reserve the right to close any account they wish, although some may guarantee that an account will only be closed for certain, pre-specified reasons, which will be listed in the account contract.

Reasons

While some of the typical reasons that an account may be closed by a bank -- for example, overdrafting the account -- do not apply to escrow accounts, a bank may have various reasons why they believe it is in their financial interest to do so. For example, the bank may believe that the money was illicitly gained or the account has simply not been used in a while. In either case, closure is not illegal.

Considerations

If a bank does close an escrow account, then the landlord and tenant may wish to open up another escrow account with another bank. Depending on the state's laws, the landlord may have a set period of time in which to place the money in another account. However, the bank in which the original money was held is not allowed to seize the money: If it closes the account, the money must be returned.