Caution fees or deposits are considered temporary incomes for landlords under the tenancy agreement in Nigeria. Escrow services are suitable devices that tenants could use to reap benefits from caution or security deposits.
An Escrow arrangement involves the tenant and landlord. They agree that a 3rd party, an escrow law firm or an escrow agent, will hold the caution deposit or fees in an interest-yielding bank account until the release conditions.
Indeed, caution deposits are a form of security that landlords request tenants to pay. Caution fees cover costs of defacing any portion of the building or replacing fittings and fixtures after the tenant vacates the building.
Generally, tenants do not recover caution deposits after the tenancy. Besides, inflation rates also reduce the tenant’s desire to recover caution fees from the landlord – our landlord knows this.
Effects of Inflation on caution deposit
Nairametrics reported that Nigeria’s inflation rate in April 2022 was 16.82%. If the tenant paid a caution fee, the inflation rate is a loss for any monthly or annual tenancy terminated in May 2022.
The inflation rate in Nigeria is on the increase. Inflation affects the value of the caution deposit. Under common law, the landlord receives the caution deposit as a bare trustee – and should account for profits.
Otherwise, the rental value for the property is the actual rent plus the caution deposit less the inflation rate on the caution deposit.
How an Escrow account helps
An escrow account is among the landlord, the tenant, and the escrow agent. An escrow services agreement governs the escrow account.
The tenant should pay a caution deposit into an interesting-yielding escrow bank account or escrow account.
An escrow account may not involve the landlord and agent opening a bank account. The landlord and tenant open an escrow account with an escrow law firm or agent who will bank the caution deposit in an interest-yielding escrow account.
The escrow agent will manage the caution deposit in the interest-yielding escrow account and provide a periodic electronic statement to the parties.
Interests in the escrow account will form part of the initial caution deposit. The escrow agent should use interests on the escrow account for the tenant whose money is subject to harsh inflation rates.
The escrow services agreement will state clear release conditions that will allow either landlord or tenants or both parties access to the cation deposit at the right time.
Our escrow services are an example of law firm escrow services in Nigeria. The benefits include:
- multi-currency options (Naira, USD, and Pound sterling)
- tailored template escrow services agreement
- efficient account reports
- opening a bank account is optional
- seamless onboarding process
- Low, transparent fees
- access to escrow officers or agents
Should the landlord insist on a caution deposit, you or your solicitors may pay the caution deposit into an interest-yielding account.
Note: This commentary is for general guidance on the related topic only and not professional advice. We recommend you obtain specific professional advice instead of acting on the available information in this legal commentary.
We make no representations or warranties to the accuracy or completeness of the information in this publication to the extent permitted by law. SRJ, our members, or agents accept or assume no liability for any consequences you may suffer if you rely on the information contained in this commentary or for the decision thereof.