How to Handle Security Deposits ('Garantía') in Accordance with Peruvian Law

As a licensed Peruvian real estate broker with years of experience navigating the intricacies of Arequipa's property market, I understand the critical importance of proper due diligence and legal compliance, especially when managing rental properties for foreign investors and expatriates. One of the most common points of confusion and potential conflict in any landlord-tenant relationship revolves around the security deposit, known in Peru as the "garantía."

This article will serve as your authoritative guide to understanding, collecting, managing, and returning security deposits strictly in accordance with Peruvian law, providing practical strategies tailored for the Arequipa context.

Understanding the 'Garantía' in Peru

The security deposit, or "garantía," in Peru is a sum of money paid by the tenant to the landlord at the beginning of a lease agreement. Its primary purpose is to guarantee the fulfillment of the tenant's contractual obligations. This includes:

Repair of Damages: Covering the cost of repairs for any damage to the property beyond normal wear and tear.
Unpaid Rent or Utilities: Recouping any outstanding rent, utility bills (electricity, water, gas, internet), or communal fees owed by the tenant upon vacating the property.
Breach of Contract: Compensating the landlord for losses resulting from other breaches of the lease agreement.

Crucially, the garantía is not an advance payment of rent and cannot be used by the tenant to cover the last month's rent without the explicit agreement of the landlord. This is a common misconception that can lead to significant disputes if not clarified from the outset.

Legal Framework: The Peruvian Civil Code

While the Peruvian Civil Code (Código Civil) doesn't dedicate a specific article solely to security deposits, their legality and function are firmly rooted in general principles of contract law, specifically Article 1681 onwards concerning leases ("Arrendamiento") and the broader concept of contractual obligations. The enforceability of the garantía hinges entirely on its clear, unambiguous inclusion and definition within a formal, written lease agreement. Without a robust contract, your ability to legally retain or utilize a security deposit is severely compromised.

Step-by-Step Guide: Handling Security Deposits Legally

Managing a security deposit effectively requires a structured, documented approach. Here's how to do it:

Step 1: Draft a Comprehensive Lease Agreement

Necessary Tool: A legally sound, notarized Lease Agreement (Contrato de Arrendamiento).

This is the cornerstone of your rental management strategy. For foreign investors, engaging a Peruvian lawyer specialized in real estate law is not merely advisable; it is essential. Your contract must explicitly detail:

Deposit Amount: Clearly state the exact amount of the security deposit.
Purpose: Define the specific purposes for which the deposit can be used (damages, unpaid utilities, etc.).
Conditions for Return: Outline the circumstances under which the deposit will be returned, including the property's condition, full payment of all dues, and a specified timeframe for return.
Inspection Procedure: Describe the move-in and move-out inspection process.
No Interest Clause: Peruvian law does not mandate interest on security deposits. It's best practice to state that no interest will accrue on the deposit.
Dispute Resolution: Include clauses for dispute resolution (e.g., mediation, arbitration, or specific judicial recourse in Arequipa).

Safety Check: Always have the contract reviewed and preferably drafted by a local Peruvian attorney. Given Arequipa’s specific legal nuances, including those related to historic properties in the Centro Histórico, a generic contract can expose you to significant risks. Once drafted, both parties should sign the contract before a Notary Public (Notario Público) in Arequipa. While not legally mandatory for all leases, notarization grants the document "fecha cierta" (certain date) and significantly strengthens its legal standing in any dispute, making it much harder for a tenant to deny its existence or terms.

Step 2: Determine the Appropriate Deposit Amount

Verifiable Detail: In Peru, the typical security deposit (garantía) ranges from one to two months' rent. For higher-end properties or furnished units, it might extend to three months.

For example, if monthly rent is S/ 2,500 (approximately US$675, assuming a current exchange rate of S/ 3.7 per US$1), a one-month deposit would be S/ 2,500. For properties furnished with valuable appliances and furniture popular with expats in desirable Arequipa neighborhoods like Yanahuara or Cayma, a two-month deposit might be more appropriate. Always consider the value of your assets within the property when setting this amount.

Step 3: Collect the Deposit Securely

Necessary Tool: A bank account dedicated to rental income (highly recommended) and official receipts.

Payment Method: Insist on a bank transfer for the security deposit. This creates an undeniable digital record of the transaction, linking the payment directly to the tenant. Avoid cash payments unless absolutely unavoidable, and if so, issue a formal, signed receipt immediately.
Receipt: Always provide an official, signed receipt to the tenant, clearly stating the amount received, its purpose (security deposit for the property at [address]), the date, and the names of both parties.

Safety Check: Keep the security deposit in a separate, accessible bank account. While not legally required to be in an escrow account, segregating these funds from your operational income makes financial management clearer and demonstrates good faith. These funds are not yours until a claim against them is justified.

Step 4: Conduct a Detailed Move-In Inspection and Inventory

Necessary Tools: Detailed inventory list, high-resolution photographs, video recording.

This is arguably the most critical step for protecting your investment. Before the tenant moves in, perform a thorough inspection of the property.

Inventory List: Create a comprehensive list of all items present in the property, especially if it's furnished (e.g., appliances, furniture, curtains, light fixtures). Note their condition meticulously.
Condition Report: Document the condition of walls, floors, ceilings, doors, windows, plumbing, electrical outlets, and any existing damage.
Photography/Video: Take clear, timestamped photographs and/or a video recording of every room and item. Pay special attention to any pre-existing damages.
Joint Signature: Both the landlord (or their representative) and the tenant must sign and date the inventory and condition report, confirming their agreement on the property's state at handover. Provide the tenant with a copy.

Local Context/Warning: In Arequipa, especially with properties in the historic center, older constructions (often made of sillar stone) might have inherent quirks (e.g., older plumbing, electrical systems not built for modern loads, minor cracks typical of adobe or older construction). Documenting these pre-existing conditions is crucial to avoid disputes later. For example, if a wall has a hairline crack or a light switch is dated but functional, photograph it.

Step 5: During the Lease Term

No Early Use: Reiterate to the tenant that the garantía cannot be used as a final month's rent. If a tenant attempts this, it constitutes a breach of contract.
Regular Inspections (Optional, by Agreement): If stipulated in the lease, you may conduct periodic inspections to assess the property's condition, always with prior notice and the tenant's consent.

Step 6: Lease Termination and Move-Out Inspection

Necessary Tools: Original inventory and condition report, photographs/videos from move-in.

When the lease term concludes, or if the tenant vacates early:

Notice Period: Ensure the tenant adheres to the agreed-upon notice period for vacating.
Payment of Dues: Confirm all rent payments are up to date, and all utility bills (electricity, water, gas, internet, cable) and communal fees are settled. Request proof of payment from the tenant (e.g., "recibos de pago").
Joint Move-Out Inspection: Conduct a joint inspection with the tenant, comparing the property's current state against the original move-in report and documentation.
Document Discrepancies: Note any new damages beyond normal wear and tear, missing items, or areas requiring professional cleaning. Take new photographs/videos to document these discrepancies.
Signed Statement: Create an "Acta de Entrega y Recepción" (Handover and Reception Act) signed by both parties, detailing the property's condition upon return and any agreed-upon deductions from the deposit.

Step 7: Return or Retain the Deposit

Necessary Tool: Bank transfer for deposit return, detailed cost breakdown for deductions.

Return Period: The lease agreement should specify a timeframe for returning the deposit. A common period is 15-30 days after the tenant vacates and all final bills are settled. This allows time to assess any damage, obtain repair quotes, and confirm utility payments.
Full Return: If the property is returned in satisfactory condition and all obligations are met, return the full garantía via bank transfer.
Partial Retention: If deductions are necessary, provide the tenant with an itemized list of costs, supported by invoices or repair quotes. Only deduct for damages beyond normal wear and tear, unpaid bills, or other justified breaches of contract as stipulated in the lease.

Safety Check: Always provide a clear, transparent accounting for any deductions. Ambiguity is a breeding ground for disputes.

Local Context and Warnings for Arequipa Expats and Investors

Notarization is Key: As mentioned, notarizing your lease agreement in Arequipa, even if not strictly required for leases under a certain duration, offers invaluable legal weight. A local Notary Public ensures the document adheres to Peruvian formal requirements, making it more difficult to challenge in court.
Historic Properties: Many appealing properties in Arequipa, especially within the UNESCO World Heritage Centro Histórico, are subject to strict municipal regulations (e.g., by the Dirección Desconcentrada de Cultura de Arequipa) regarding modifications and repairs. Be aware that the cost and time required for repairs on such properties might be higher, and certain repairs will definitely require municipal permits. Factor this into your deposit retention and repair processes.
Utility Bills: It's common for utility bills (especially electricity and water) to be delayed by several weeks. Ensure your lease allows for retention of a portion of the deposit until these final bills are confirmed and paid. The local electricity company in Arequipa is SEAL, and water is SEDAPAR.
Informal Agreements: Avoid informal rental agreements. While "gentlemen's agreements" might seem convenient, they offer zero legal protection in Peru and are a recipe for disaster with security deposits.
Tax Obligations: Remember that rental income in Peru is subject to income tax. As a landlord, you are generally required to pay a monthly income tax (Impuesto a la Renta de Primera Categoría). This is typically 5% of the rental value after a 20% deduction, resulting in an effective rate of 6.25% of the gross rent. You must declare and pay this to SUNAT (Superintendencia Nacional de Aduanas y de Administración Tributaria). While not directly related to the deposit, it's a critical landlord responsibility that impacts your overall rental operation.
Dispute Resolution: If a dispute over the security deposit arises, initial steps might involve a formal letter from your lawyer. If conciliation fails, legal action in the civil courts of Arequipa might be necessary. This process can be lengthy and costly, highlighting why a solid contract and meticulous documentation are your best defense.

Common Pitfalls to Avoid

Lack of Written Agreement: No contract, no legal leg to stand on.
Vague Contract Terms: Ambiguity regarding the deposit's purpose or return conditions.
Failure to Document Condition: No objective proof of property condition at move-in/move-out.
Co-mingling Funds: Mixing the deposit with personal or operational funds.
Unjustified Deductions: Deducting for normal wear and tear or without proper justification and documentation.
Delay in Return: Unreasonably delaying the return of the deposit without valid cause.

⚠️ Legal Notice: Consult a Local Lawyer. The information provided in this article is for general guidance only and does not constitute legal advice. Peruvian real estate law, especially concerning rental agreements and security deposits, can be complex and is subject to interpretation and change. For specific advice regarding your individual situation, it is imperative to consult with a qualified, licensed Peruvian attorney specializing in real estate law in Arequipa.

Navigating the security deposit process in Arequipa, while requiring attention to detail and legal compliance, is entirely manageable with the right approach. By adhering to the steps outlined above and prioritizing clear communication and thorough documentation, you can protect your investment and foster a transparent, professional landlord-tenant relationship.

For further insights into property management, investment opportunities, or to connect with trusted legal counsel in Arequipa, visit ArequipaRealEstate.com.