Earnest money when renting an apartment: reserve without disputes
Want a payment to lock in the date and not get lost in a dispute? Then call it earnest money, in so many words, in a signed agreement. Only earnest money has the effects described in Article 394 of the consolidated text of the Civil Code, while an advance payment is returned if the agreement falls through. Earnest money when renting an apartment is especially useful when you have two people interested in a unit from next month and want to settle the matter with a single transfer. Below you will find a comparison of the three types of payment, a template for the reservation clause and what happens when someone backs out.
Earnest money, advance payment or security deposit: how do these rental payments differ?
Earnest money secures the signing or performance of an agreement. An advance payment is simply part of the price paid up front, and a security deposit protects claims under a tenancy that is already running. Each of these payments behaves differently when things fall apart. That is why what you call it in the document has real consequences.
| Earnest money | Advance payment | Security deposit | |
|---|---|---|---|
| Purpose of the payment | Securing the signing or performance of the agreement | Part of the price paid up front | Securing claims under an ongoing tenancy |
| When it is paid | When the agreement is signed (e.g. a reservation agreement) | Before the agreement is performed | When the lease is signed or the unit is handed over |
| The tenant backs out | The landlord may keep the earnest money | The advance goes back to the tenant | The tenancy never started, so there is nothing to secure |
| The landlord backs out | The tenant may demand double the amount | The landlord returns the advance | The deposit goes back to the tenant |
| After the agreement is performed | Counted towards the amount due | Counted towards the payment | Settled when the tenancy ends |
Under Article 394 of the Polish Civil Code, if one party fails to perform the agreement, the other may withdraw from it without setting an additional deadline and keep the earnest money received. And if it was the one who paid it, it may demand twice the amount. An advance payment does not work that way. When the agreement falls through, the money simply goes back to whoever paid it. Earnest money and a security deposit, on the other hand, belong to two different stages: the first protects the reservation, the second protects the unit during the tenancy (and it has its own rules on when you can keep the deposit, but that is a topic for another article).
Apartment reservation fee: why the name alone is not enough
Neither a “reservation fee” nor a “reservation” exists in the law. If the agreement does not say what the payment is, in a dispute it can easily be treated as a refundable advance. Doubts are usually resolved in favour of returning the money. So the words “earnest money” have to appear in the document. Full stop.
The “advance or earnest money” question in rentals usually comes up after one classic mistake. A candidate makes a transfer titled “reservation”, and nobody has signed an agreement. That is a problem, because earnest money is given when an agreement is signed. A transfer on its own, without a document naming the parties, the unit and the date, does not give the landlord a strong position. Nor the tenant, for that matter.
How to put an apartment reservation with earnest money in writing and avoid a dispute
You record the reservation of a rental apartment in a short written agreement (a preliminary agreement, or straight away in the lease), in which the payment is explicitly called earnest money. It does not need to be a treatise. One or two pages are enough, as long as nothing is missing:
- The parties and the exact address of the unit.
- The date for signing the lease or handing over the apartment.
- The main terms of the tenancy: rent, term, amount of the security deposit.
- The words “earnest money” and the amount.
- How the earnest money will be applied once the lease is signed, e.g. towards the first rent or the security deposit.
- Signatures of both parties and confirmation of payment.
The law says that once the agreement is performed, the earnest money is counted towards the amount due. In my view it is better to write down right away exactly what it goes towards than to argue about it later. One more thing: before you take the money, find out what you may check about a tenant. Once the payment is made, backing out of your own decision simply costs money.
What happens to the earnest money when the tenant or the landlord backs out?
If the tenant backs out, the landlord may withdraw from the agreement and keep the earnest money. If the landlord pulls out, the tenant may demand double the payment. So whether the earnest money on a rental is refunded depends on who failed to perform the agreement and why.
- The tenant pulls out - the landlord keeps the earnest money and looks for the next candidate.
- The landlord pulls out, e.g. because they chose the other candidate - the tenant may demand twice the amount.
- The agreement is terminated by mutual consent - the earnest money is returned and the obligation to pay double falls away.
- Neither party is responsible for the non-performance, or both are - the result is the same: the payment is returned without doubling.
Tempted to take earnest money from both candidates at once? Don’t. The agreement will certainly not be performed for one of them, and that person can then demand double the amount. If the dispute is about who is at fault, or the situation is unusual, hand the matter to a lawyer. It is not worth the stress.
Two candidates for one date: how to handle it fairly
You take earnest money from one person only, and only once you have decided. You tell the other candidate plainly that they are on the waiting list. Simple. It saves both sides a lot of stress, and you do not risk paying back double.
When choosing a tenant, look at the move-in date, whether they have given you all the information and whether they are ready to sign the lease right away. And if the number of candidates starts dropping in the months that follow? Then review the mistakes in your rental listing. Once the lease is signed, Tenanto takes care of unit and lease statuses and reminders about leases that are ending, and you can create a free landlord account there.
Earnest money when renting an apartment only works if it is named and written into an agreement signed by both parties. I recommend sticking to one order: first the decision on the tenant, then the document, and the transfer last. You will find more practical tips in our articles on managing rentals.
Frequently asked questions
Yes. Once the agreement is performed, the earnest money is counted towards the amount due. It is best to state in the agreement exactly what it goes towards, so there are no two interpretations when settling up.
It is risky. Earnest money is given when an agreement is signed, and without a document it is hard to prove what terms and what date the parties agreed on. And therefore who failed to keep to them.
If neither party is responsible for the non-performance of the agreement, the earnest money goes back to whoever paid it. Whether your situation meets that condition is best assessed with a lawyer.
