Security Deposit

What You Need to Know About Security Deposits from

A security deposit conflict is one of the most common landlord and tenant disputes which often lead to court cases. Security deposit laws vary from state to state so be sure you are informed about the law in your state. The following is information that every landlord should have.

1: The purpose and use of a security deposit

A rental security deposit is, by law, an amount of money paid by the tenant and held by the landlord to cover damages to the property which are over and above normal wear and tear. The security deposit remains the property of the tenant while the landlord holds a security interest in it. The legal definition of “normal wear and tear” can vary from state to state but it is almost always a common sense definition. Slight wear on a carpet, for example, wear due to normal, everyday use. On the other hand, rips or holes in the carpet are a cause for the forfeiture of the security deposit in the necessary amount to repair the damage. If a tenant has caused damage to the property beyond normal wear and tear, advises that the landlord take photographs to document the damages and keep any receipts for repairs. Repairs must be made in a timely fashion.

Deposits can also be used to cover unpaid rent. If a tenant breaks a lease and abandons a property while still owing rent, the security deposit, in part or in full, is forfeited to cover the unpaid amount. See additional information about forfeiture of a security deposit for unpaid rent below.

2: Security Deposit Amounts

p>Many states limit the security deposit amount that a landlord can charge a tenant. The generally accepted amount allowed for a security deposit agreement is one to two month’s rental amount. Landlords should check with their state for the legally allowed amount. Attempting to charge more could result in penalties and fines. Some states require a maximum amount of one month’s rent for a security deposit if the tenant is 62 years or older.

3: Holding a security deposit

Most states have laws requiring a landlord to maintain an escrow account for the purpose of holding security deposits. A landlord may not use the security deposit for any purpose other than the intended use that is set by law. Security deposits cannot be co-mingled with the landlord’s general fund, or put in a personal account.

Some states allow a landlord to create an interest bearing escrow account. The states that allow interest bearing accounts also have laws about who may collect the interest on the account, and how often the interest must be distributed. There are also state laws which require the landlord to pay any fees incurred to establish and maintain the account. Many states require the interest accrue in the account until the lease terminates. Some states allow the tenant to split the interest with the landlord.

3: Retention of security deposit

In the event that a tenant breaks a lease, the landlord must immediately put the rental property on the market and try to find a new tenant. If a new tenant is found before the old tenant's deposit period expires, the rent the new tenant pays must be credited to the old tenant who broke the lease. For example, if a tenant breaks a lease and has a two-month deposit and the landlord rents the property within one month, the landlord can only keep one month’s worth of the deposit. To keep the entire deposit, in this example, is against the law and the landlord can be penalized and fined. In some states, after a tenant is 10 days late on paying their rent, the rent amount may be retained from the deposit by the landlord unless there is a late charge specified in the Lease Agreement. In that event, the security deposit cannot be retained.

When a landlord has determined that any part of the deposit should be forfeited, a detailed letter should be sent to the tenant with a full explanation of what caused the forfeiture. We recommend that the landlord send this letter by certified mail and attach any invoices for repairs. If, at this point, the tenant disagrees and decides to go to court, the landlord will have documentation to support the decision to retain part, or all, of the security deposit.

If any of the security deposit is kept by the landlord, he or she should itemize the use of the deposit and return any balance. Each state has a law that specifies the amount of time a landlord has to return either the deposit, or if the deposit is kept, the itemized accounting report. If a landlord exceeds that time, a court considers the delay deliberate or a bad-faith-retention of the deposit. If the court finds that a delay is deliberate, the landlord can be ordered to pay two or three times the amount of the deposit to the tenant.

4: Additional Information on Security Deposits advises that the lease specify the amount of the security deposit, where it will be held and what it is meant to cover. In addition, a landlord can give the tenant a security deposit receipt that includes this information. When disclosing the location of the security deposit, the name of the bank is sufficient; it is not necessary to add an account number. Many landlords have a “move-in check list” that is given to the tenant when he or she moves into the property. The tenant has a short amount of time to complete and sign this list. This check list indicates whether items on the premises are in good, working condition, and can be used when the tenant moves out of the property as verification that things were in good shape during the time of move-in.

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