Marty you are in NJ, right? According to my book, your law says, "LLs w/ 10 or more units must place SD in an insured money market fund account where the investments mature in one yr or less, or in another account that pays quarterly interest at a rate comparable to the money market fund. LLs w/ fewer than 10 units may place deposit in an interest bearing account in any NJ financial institution insured by the FDIC. All LLs must pay tenant interest earned on account annually or credit toward payment of rent due." Unless you have 10 units, putting his SD in any bank seems to fit the bill (all banks pay interest and are insured by the FDIC). And I didn't read anything about it having to be in a seperate account. Look in NJ Stat. Ann $$46.8-19 to 46:8-26 to see exactly what the law says in case I am reading it wrong. Account for interest on his SD now, IF he has been there a year, and credit it towards his last month's rent. NJ law says you cannot terminate for non-payment of rent for 30 days (that sucks, here we can file serve a 3 day the very next day). Send him a letter stating that he cannot use his SD for his last month's rent. List all fees he owes and a total he must pay within 30 days or you evict him (even if he is already out!). Remember to give him credit for the interest on his SD if he has been there a yr.
I also read the NJ allows you to give him a 3 day notice to cure a lease violation (like not paying the fees owed) before you could evict. This route may be faster. IF your lease specifies that these fees must be paid, and you have notified him consistantly that he owes them, give him a 3 day to cure AND pay the rent. (Be sure to specify exactly where in the lease it says he has to pay these fees.) If he doesn't cure, begin evicting. I think you could take him to court (according to the law I stated above, it seems that you followed the law). In future, put a clause in the lease that sates they must "pay any fees owed from the previous month before any money is applied to the current month's rent regardless of any notation on any check or money order" you receive. And have the tenant sign this section. Then when they fail to pay the late fee, you take it out of the next month's rent check and the rent was not paid in full. Check out the above statutes and good luck.