Security Deposits

Introduction

      The failure of some landlords to establish a clear and fair system of setting, collecting, holding and then returning security deposits has contributed significantly to the negative landlord image.  It has also resulted in legislation in most states and countries that now regulates almost every aspect of rental housing deposits.  Neglecting to inspect and document the condition of the rental unit before the tenant moves in often leads to disputes or misunderstandings over security deposits when the tenant moves out.  Consequently, many landlord tenant laws now require that inventory or move-in check lists be completed and signed, prior to occupancy, in order for any charges to be deducted from security deposits for damage.
      Unscrupulous landlords have contributed to over regulation of rental housing in many ways, but perhaps the single most frustrating is their unwillingness to treat security deposits as the tenants money.

NOW THE BAD NEWS  Most landlords are not in strict compliance with their state's security deposit laws.  Penalties for unlawfully withholding any of the tenant's money are often double or triple damages, plus actual attorney fees.  Landlords must always be very careful when making any disputed deduction from a departing tenant's security deposit.  Sometimes eating the cost of minor damage is very cost effective for landlords.

How to Make Deductions from a Security Deposit

     Some states allow deductions for cleaning, others do not. Some require move-in and move-out check lists in order for a landlord to make any claim for damages. If you are going to play the game, you must know and follow the rules in your location. The following are some general rules that apply in most states and are based primarily on common sense.

If you wish to withhold all or part of a security deposit to recover back rent, utilities or to repair damages caused by a tenant or their guest, make sure your accounting is detailed and complete. Most states require that landlords return security deposits, with a detailed list of any deductions, to the tenant within 30 days after they move out, but some states allow as little as 7 days.  be sure to check the law of your state.  Landlords are notorious about providing sketchy information about deductions for sometimes dubious damage. The claim against a security deposit must include valid estimates for any repairs, or the cost of those that have been done.
      An inadequate accounting in a timely manner invariably leads to disputes, because the tenant won't know exactly what damage you're claiming.  Imagine a bill from your mechanic that simply says "fixed your car." Disputes lead to all kinds of trouble, the least of which may be a law suit. And if a court finds that you wrongfully withheld some or all of the security deposit because you didn't provide enough detail, it may cost you a bundle.  Some states disallow keeping any of the deposit if the law was not followed and some states award two or three times damages to tenants whose deposits were returned or accounted for in accordance with the law.

Points to Cover in Itemization

• Unpaid rent and late charges
• Utilities due, including showing pro-ration calculations.
• Each damaged item and its location.
• The kind of damage, with detail.
• Repairs that are needed or have been done.
• Repair or replacement cost, including how you calculated allocation or pro-rations when useful life is an issue.

      Examples of security deposit itemization forms can be found in our Forms Web.

Damage, Cleaning, or Ordinary Wear & Tear?

      When you retain all or part of an former tenant's security deposit, you must explain why you considered the damage worse, or different, than ordinary wear and tear. Most state laws and standard leases state that a renter is not responsible for ordinary wear and tear. Some states even define the term, for example: "natural and gradual deterioration of the rental unit over time, which results from a resident's normal use." We further define the term, and most others relating to the rental housing business, in our Glossary.
      If a landlord doesn't clearly describe the kind of damage and where it occurred, a court might say that the deduction was "arbitrary" and disallow it because the differences between damage and wear are sometimes subtle. We provide a list of examples on our Wear & Tear page.
      Many states, including Michigan, do not allow a deduction from security deposits for cleaning. They rationalize the law by contending that cleaning is a normal cost of doing business.
      Some landlords give tenants a schedule listing the cost of cleaning, repairing or replacing specific items when they move in. If you do this, you should obviously use the same costs when you make deductions.
      If you don't provide a cost schedule and you're sending out the notice of deductions before you've done the repair or gotten an invoice, you should use a good faith estimate of the cost. As long as your estimate is "reasonable" and based on going rate in the area, a court should allow it.

Landlord Tenant Legal Troubles

      In a 1992 Ohio case, a landlord sent a refund check for part of the security deposit and an itemization explaining why she was keeping the rest of it.  One entry read: "$40 cleaning." When the former resident challenged the deduction, the court ruled that the itemization wasn't specific enough.  The owner had to pay $580, twice the $40 that was wrongfully withheld, plus $500 to cover the former tenant's attorney's fees.  The tenant had asked the court for $4,179 in attorney's fees and both parties appealed.  The trial Courts decision was affirmed, stating that attorney fees had to bear some relationship to the amount of money and the simplicity of the issues. [Nolan v. Sutton].

      Good detail helped a Connecticut landlord defend the security deposit deductions when the former tenant complained to the court that the damage wasn't properly itemized.  The judge upheld $583. in deductions and went out of its way to praise the owner for "noting with particularity which rooms required work" [Martinick v. Rothman].
      A Michigan landlord withheld all of a one month security deposit as rent due, because a tenant over stayed her 30 day notice by three days.  The tenant complained to the court that she should pay per diem for the three days. The landlord countered that they set their rent amount by the month, not by the day.  The court agreed, noting that daily rates in hotels are substantially higher than monthly rates. [Atherton v. Lick]
      A Louisiana landlord refused to return the security deposit of a resident who'd lived in an apartment for four years. The owner sent a notice asserting that the resident left "considerable damage." This wasn't a valid itemization, the court ruled, because the owner wasn't specific about the nature of the damage. As a result, the owner had to pay the resident $400 [O'Brien v. Becker].

Pet Deposits

      The Humane Society of the United States, reports that some 49.4 percent of U.S. renters have pets.  Yet only five percent of rental housing anywhere allows animals.  That means that tenants are lying to landlords about having pets when they move in, or acquiring a pet in violation of the lease agreement later.  Perhaps it happens because of a seemingly intractable attitude by landlords that pets cost them money so they refuse to even discuss the issue.  Either way, landlords and tenants inevitably get into hassles that poison their relationship.
      According, since the odds are high that pets will end up in your rental unit anyway, it is often better to voluntarily accept pets and protect yourself by discussing the pets in the lease, collecting a pet deposit, and charging a pet differential.  You should also make sure that everything is clear regarding duties and responsibilities associated with pets by having comprehensive clauses in you lease or by separate Pet Agreement.
      Although the majority of states do not address pet deposits, there are some states that do. Nebraska, for example, limits the amount to 25 percent of rent.  The law does not appear to address the issue of refundable vs. non-refundable or discuss the need for an accounting.  However, even Nebraska does not require the landlord to allow pets in his property. Since laws must usually be applied equally to all tenants in a property, Nebraska landlords would likely be required to either ban pets from all units of a particular property or limit the deposit to 25 percent for all units.  Since the laws of those few states that do consider pet deposits vary significantly, you must check the laws of your state regarding the issue.

Documentation

      We all know that it is good practice to complete a checklist at move-in and move-out and some state landlord-tenant laws mandate such checklists.  In the modern world where computers, digital cameras, and video camcorders are there is no excuse for a landlord to fail to have adequate documentation showing the condition of a rental unit at move-in and move-out by a tenant.
      Doing this has several benefits.  First, you can compare the before and after photos when completing the statement due the tenant when deducting for damages rather than depend upon your recollection of one or more years ago.  Second, you will have proof of damages if you need to argue the matter in court.  Third, if you make sure the tenant knows that you have the photos, it is less likely that he will argue the matter to begin with.  You can even take the photos while doing a before and an after walk-through inspection with the tenant so that the tenant knows what you have.  Finally, you can even send copies of before and after photos relevant to damages for which you are charging along with your accounting statement.  Those who have a digital camera and are somewhat computer savvy can shoot hundreds of photos before and after and store thousands of such photos on a CD (lowest resolution is adequate for most shots).  Shooting 30 minutes of video provides even more detail and coverage.  And, for those not knowledgeable or so equipped, considering that one can buy a 36-picture roll of 35mm film and have it developed with double prints for under $10, there is no excuse for failing to shoot at least one roll before and at least one roll after each tenancy.
      Whether you do or do not obtain photographic evidence, be sure to utilize an adequate written checklist that is signed by the tenant at move-in and, if possible, at move-out.  Although it may seem a bit intense, we highly recommend the use of a form that separately covers each room and other areas in detail, such as the one named Super Checklist that is available from our Forms Web.

Security Deposit Insurance

      Often, tenants have difficulty coming up with substantial security deposits, in addition to the first (and sometimes last) month's rent when signing a new lease. Security Deposit Insurance allows tenants to pay a small monthly fee instead of a large cash deposit at move-in; usually between 1 and 5% of the monthly rent. 
      There are major benefits to landlords as well. Almost every state, and some local governmental units, extensively regulate the amount and disposition of deposits. The mandated administration becomes a financial burden instead of benefit for the landlord. 
      In the event of tenant default in rent or a claim for damages, the insurance company pays the landlord within thirty days; no hassle, no court date, no legal fees.
      Additional information can be found on our Security Deposit Insurance Page.

Summary

      Because the penalty for wrongfully withholding a security deposit can include double or triple damages plus attorney's fees, even a small mistake can get very expensive. Like the Ohio and Louisiana cases, landlords can lose hundreds, even thousands of dollars for improper deductions or inadequate paperwork. However, a landlord who knows his business and follows the rules, can often prevail as in the Connecticut and Michigan cases.

Also see: Citations for State Laws on Security Deposits.