An Examination of the Role of Security Clauses and Deposits in Residential Lease Contracts
Marcus T Allen,
Richard Buttimer and
Neil G Waller
The Journal of Real Estate Finance and Economics, 1995, vol. 10, issue 3, 83 pages
This paper argues that security clauses in lease contracts create a contingent claim on the value of the leased property, which resembles a put option on common stock. Adapting the standard results from option pricing theory gives insight into how landlords determine security deposit amounts, which serve to guarantee performance of the contract. Empirical tests show that deposit amounts are affected by the propensity of a property to be damaged, the propensity of a tenant to cause damage, and other characteristics of the landlord-tenant relationship. Two-stage least squares and probit regression estimates, however, provide only limited evidence to suggest that advance deposits significantly reduce tenant damages in the residential rental market. Copyright 1995 by Kluwer Academic Publishers
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