Escrow

Full Definition

In security deposit law, escrow refers to the requirement in some states that landlords hold the tenant's security deposit in a dedicated, separate bank account -- not commingled with the landlord's personal or business funds. The purpose of the escrow requirement is to protect the tenant's money in the event the landlord becomes insolvent, files for bankruptcy, or misappropriates the funds. States with strict escrow requirements include Massachusetts (which requires an interest-bearing separate account with specific disclosure requirements), New Jersey (which requires a federally insured bank account and annual interest payments), and New York (for buildings with 6+ units). Commingling the deposit with personal funds is itself a violation in these states and can trigger the same penalties as wrongful withholding. In states without escrow requirements, landlords may hold the deposit in any manner they choose. Even in states without mandates, prudent landlords maintain separate accounts for deposits to simplify accounting and demonstrate good faith in any dispute.