If you’re a landlord in Massachusetts, it’s important to understand how to properly handle last month’s rent (LMR) deposits in compliance with state law. It’s an area where even experienced landlords can trip up, especially when it comes to handling interest payments and deposits. Here’s a clear breakdown of our view on what the law actually requires — and what it doesn’t.

Do Massachusetts Landlords Have to Escrow Last Month’s Rent?

No – last month’s rent is not treated the same as a security deposit. LMR is an advance deposit towards the last month of a tenancy and is considered the landlord’s property. A security deposit belongs to the tenant and is held in trust by the landlord, only to be released to the landlord at the end of a tenancy in the event of unpaid rent or property damage. Under G.L. c. 186, § 15B, only security deposits are required to be held in a separate escrow account. LMR is treated differently.

While there are certain obligations tied to the receipt and holding of LMR, the law does not require landlords to escrow LMR separately from their general funds. This is a common point of confusion, but it’s confirmed by the statute itself — specifically G.L. c. 186, §15B(2)(a), which makes no mention of escrow.

Read the statute here

Do Landlords Have to Pay Interest on Last Month’s Rent?

Yes, but here’s where things get more nuanced. The law states that at the end of each tenancy year, tenants are entitled to interest on their LMR at 5% annually — or the actual interest earned, if lower.

That said, there’s no obligation to place last month’s rent in an interest-bearing account. But if a landlord does deposit it in such an account and interest is earned, the law is clear: that interest must be paid to the tenant at the end of each year. Landlords cannot profit from holding onto tenant funds paid in advance.

This was affirmed in Neihaus v. Maxwell (54 Mass. App. Ct. 558, 561 n.6 (2002)), where the Massachusetts Appeals Court clarified that while escrow isn’t required, interest must be paid if any accrues (“The landlord is not required to set aside the tenant’s last month’s rent or to place it in a bank account; however, he is required to pay interest on it at five per cent or any lesser rate paid by the bank, if the money is, in fact, deposited.”)

No Interest-Bearing Account? No Interest Owed (Usually)

In Gallo v. Marinelli (90 Mass. App. Ct. 1107 (2016)), the Appeals Court held that if the landlord deposits last month’s rent into a non-interest-bearing account, then no interest is owed to the tenant. This ruling offers landlords some flexibility: if no interest is earned, there is no obligation to pay it out.

But Be Careful: No Bank Deposit May Trigger a 5% Obligation

A key exception arose in Couture v. Sloan (96 Mass. App. Ct. 1116 (2020)), which seems to contradict the holding of Neihaus. In Couture, the court held that a landlord who didn’t deposit the last month’s rent (presumably paid in cash) in a bank at all, was automatically liable for 5% interest, regardless of whether any interest was earned.

This issue arose again in Michaud v. Sisson (Southeast Housing Ct. No. 19H83CV00096NB (2020)), where the Housing Court reinforced this interpretation. Despite the landlord’s reliance on Gallo, the court found that failing to deposit the funds altogether triggered the 5% rule.

What are Some Best Practices for Massachusetts Landlords?

Based on the current law and case precedent, here are the practical rules of the road:

• You are not required to escrow last month’s rent.
• You are not required to use an interest-bearing account, but if you do (including an interest-bearing operating account), you must pay the interest to the tenant.
• You cannot keep any interest that accrues on the tenant’s funds.
• You should not avoid depositing last month’s rent entirely — that may result in an automatic 5% interest obligation.

To stay compliant and avoid unnecessary disputes, it’s wise to establish a consistent and transparent policy for handling LMR. Whether that means using a non-interest-bearing account or diligently tracking and disbursing any accrued interest, the key is knowing your responsibilities under the law.

Need Help Navigating Massachusetts Rental Law?

At Ligris, we help landlords stay compliant, avoid costly mistakes, and resolve tenant disputes efficiently. If you have questions about security deposits, last month’s rent, lease agreements, or evictions, contact Josh Krefetz at Ligris + Associates PC.

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