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THE SECURITY DEPOSIT:  USING IT, ACCOUNTING FOR IT, AND DEFENDING IT IN SMALL CLAIMS COURT

Copyright  2001-2011  Landlord.com

PART ONE

INTRODUCTION

The security deposit has become a fruitful source of small claims litigation in recent years.  Burgeoning rental rates have led to burgeoning deposits and have given former tenants a real stake in recovering some of their money.  As little as ten years ago, a tenant might move into an apartment in most areas of the US with as little as a $250 deposit, nowadays security can run into thousands of dollars.  In response, legislatures in most states have enacted laws mandating procedures designed to disclose to the former tenant the manner in which the deposit has been disposed of and inviting resort to small claims court for the resolution of disputes about the use of the money.  At the same time, the landlord, confronted with astronomical labor and other costs for the restoration of his rental unit after a tenant move out, must justify very substantial deductions from the deposit, even to tenants who have left the premises in relatively good condition, due to increasingly strict legal standards of premises condition at the inception of the new tenancy.

            This article will explore the ways in which the landlord can justify, at a small claims court trial, if necessary, his deductions from the security deposit.  That premises rented to new applicants are expected to be in near pristine condition is not something we should argue with here, and neither is the reality that many deposit disputes will end up before a judge in small claims.  This article is not intended to be an adumbration of what can be deducted from the deposit and what cannot, an article which would have to be written 51 times, once for each state and the District of Columbia.  This is an article which will assist you in developing a record which will get you through the small claims court proceeding if the matter gets there, deter it most of the time, and ensure your deductions from the deposit stand up.  By following our suggestions, you not only will prepare your record thoroughly enough to be fairly safe, but you also will be amazed at how little effort is required.  Preparation for the trial in small claims court begins even before the tenant who might take you there moves in.  Forethought is necessary.

USING AND ACCOUNTING FOR THE DEPOSIT

            Despite differences in detail, the Devil is in the details, all jurisdictions recognize the salient purposes of the security deposit to be as follows:

                  1.  To secure faithful performance of all terms of the rental agreement; and

      2.     To remedy defaults in payment of rent and other monetary obligations under the rental agreement; and

      3.    To restore damage to the premises, over and above normal wear and tear; and

      4.     To clean the premises when the tenant leaves.

From this we may infer that the foundation for defense of the use of the security deposit is to keep accurate records of any monetary obligations in default at the time of move out, and so document the condition of the premises before and after the tenancy that a comparison of the relative condition of the premises can be made.  It is this process, and the presentation at the trial, that we will deal with in detail.

            Documentation of monetary defaults is the more straightforward of the two tasks and need not consume much space.  A bookkeeping method that permits accounting for accrual of rent, late charges, and other charges during the course of the tenancy, and payments against them, should suffice.  Retention of these records, together with source documents, is essential.

            Deductions from the security deposit for damage to the property and cleaning should be guided by a well thought out policy.  Some items are chargeable according to specific laws and some are not.  Some items are chargeable as a matter of basic fairness, and some are not.  These are not the same.  Furthermore, it may be worthwhile to disclose to a new tenant in advance what he can expect to happen to his deposit under your policies.  Most security deposit litigation occurs as a result of the former tenant being surprised when he expected a substantial refund and did not get one.  Disclosure at the inception of the tenancy is not possible unless there is something coherent to disclose, that is, a policy.

            Establishment of a policy requires a decision on how damage to the premises will be distinguished from normal wear and tear, and how the damage will be charged to the former tenant.  The rental unit will gradually wear out just because it is being used.  Its different components will wear at different rates.  The tenant, with a right to occupy and use the premises, is entitled to the benefit of this wear during his tenancy.  It is only if he exceeds it that he may directly be charged for the cost of restoration.  The normal wear is considered to be part of what the tenant pays for with his rent.

            A small claims judge is most likely to view a deduction from the security deposit as reasonable if it is calculated to charge the tenant only for what he has destroyed.  For example, let us suppose that the tenant does something during move out which damages the stove beyond repair.  It may not be fair to replace the stove and pass on the cost of a new stove to the exiting tenant.  If the typical stove is expected to last for eight years, and the stove is four years old when the tenant moves out, by charging the whole cost of a new stove, the landlord is getting a windfall of four years of service, since he would have to replace the stove in four years anyway.  It is more truthful to say that the tenant has deprived the landlord of one-half of a stove, and charge accordingly.

            By thinking in terms of service life instead of the one time cost of replacement, the landlord can arrive at a policy that will stand up to very sharp scrutiny for fairness.  A determination, based on personal experience and the experience of other landlords, will permit you to formulate amortization schedules for things like stoves, carpets, paint jobs, and so forth.  Some things such as window glazing, for example, do not wear out and may simply be charged against the deposit, as may out and out vandalism like holes in walls.

            The next decision is who does the work.  The best approach, and the most expensive, is to employ licensed contractors.  The market sets their rates and they are independent, so their charges are considered fully trustworthy.  If you have a large enough number of properties that you have employees to do maintenance and repair, or a small enough number so that you do the work yourself, set a labor rate to be charged in advance.  It should be a compensatory rate, not one designed to make a profit.  The use of unlicensed handymen, etc., is sometimes not a good idea as it raises questions of legality under the licensing laws and possible collusion.

            Deductions for cleaning may be handled differently.  The strongest stimulant to security deposit litigation seems to be the deduction for cleaning.  Nothing on the security deposit accounting is more likely to provoke an angry response than a $250 professional cleaning charge when the tenant knows full well that the place was "clean" when he left.  The issue of sanitation, however, is quite legitimate to a landlord concerned with liability to a new tenant, not just because the tenant may become dissatisfied with the condition of the unit after he moves in, but if he comes down with a disease which can be traced to improper sanitation and cleaning of the unit.  For this reason, many landlords take the position that a professional cleaning will occur, no matter the apparent condition of the premises.

            If this is to be the case, then it is best to disclose it to the tenant in advance, before the lease is signed.  This is an increasingly common but not new practice, and one that is being recommended by several writers.  The disclosure is simple and need be in no particular language.  It is simply a written notification, perhaps in the form of a letter, given with the house rules and lead paint disclosure, which advises the tenant that on move out the premises will be professionally cleaned, that it will cost approximately "$X," that this is done as a matter of policy in all units and for all incoming tenants, and that the previous tenant paid for such a cleaning for the new tenant.  It should also advise that the cleaning does not include rubbish and garbage removal, and it is expected that the premises will be free of those.

            Having established what will be charged and how, you must now turn your attention to establishing and maintaining a record of the condition of the rental unit.  This record should cover its condition upon renting it to the new tenant, its condition during the tenancy, and its condition when possession was surrendered.  This is not a particularly onerous task, but is vital if the disposition of the security deposit is to be upheld.

            There are two items that will serve best to document the condition of the premises at move in.  The first is the record of work done in preparation.  This will include invoices for the cleaning charges and painting, any repairs which were made, and new appliances.  The second is the move in checklist.  This is a document with lists of items included in each room in the unit, such as the stove and refrigerator, window coverings, floor coverings, walls, and so on.  Such forms are commercially available and downloadable from the e-Forms section of our site.  It takes only a few minutes to fill out such a form during the walk through before the signing of the rental agreement.  Such a form is the only way to document the absence of damage.  Photographs are not very useful for this, absent a complete mapping of all surfaces of the unit, much as our space probes did with the surface of Mars.  But this is not very practical.  So you should use the move in checklist and be sure it is signed by all parties who sign the lease, and maintain it as a part of the original lease.  Naturally, any discrepancies noted at the walk through should be fixed at once, and the corrections documented.

            Documentation of maintenance events during the tenancy, or the lack of them, is necessary in order to head off the claim that landlord neglect made it appear that the premises suffered greater than normal wear and tear or actually caused part of the damage claimed.  You will already be doing this as part of your effort to comply with the requirements of the warranty of habitability.  A system of written maintenance requests and documentation of the dates, times and nature of requests and repairs is what is needed.  Supplement this with semi-annual consensual inspections of the property.  By maintaining your maintenance records well and acting in accordance with the requirements of the habitability warranty, this facet of the security deposit record will be generated automatically.

            The final aspect of the security deposit record is the establishment of the condition of the property at surrender of possession.  There are opportunities at this point to head off problems, and possibly even to salvage the tenant, which should be taken care of in addition.

            While little can be done in advance with a tenant who skips or one who is being evicted and not likely to be cooperative, the tenant who has given 30 days notice to vacate should be contacted and, if possible, visited, as soon after the notice is given as possible.  In this visit, you should ask the tenant why he is moving.  It may be that it is something that you can accommodate, and may give the opportunity of retaining the tenant and avoiding a vacancy altogether.  If this is not the case, then this is the time to go over what is expected of the tenant on move out.  He should be reminded if there is going to be a professional cleaning charge so he does not have it done himself or otherwise set himself up for an unpleasant surprise later.  If possible, a quick walk through of the unit might be made to determine if there appears to be anything of major proportions in store.  A firm date for surrender of possession and the final walk through should be set at this time.  It is also a good time to remind the tenant that his deposit may not be used for rent pending his move out, but that he must pay the rent just as he would normally, through the last day of his occupancy.

            Documentation of the condition of the premises upon surrender of possession should take place just then and no sooner.  All furniture and other belongings of the tenant should be out of the unit, and the keys in his hand ready to hand to you.  There should be no question of his returning to collect his tools, or vacuum the carpet, or anything else.  Such access to the rental unit might result in damage to it, which cannot be documented as being caused by him.

            One of the methods of documenting condition is a walk through and checklist, as was done upon move in.  Whatever checklist is used, however, should include a statement that it is a listing only of items visible upon surrender, and that there is no agreement between the parties as to latent problems which might surface later.  It is because of this latency factor that you might prefer not to generate a written record of the move-out walk through.

            A much better practice is to photograph all physical damage as soon as the tenant turns over the keys and walks out.  Use a Polaroid so you can judge whether the photograph is clear enough immediately.  Problems with appliances should be documented by retaining repairmen's invoices.  All work should then be done promptly.

            Now is the last point at which a legal dispute over the deposit can be deterred.  All work having been done it is time to prepare an accounting and refund check.  Many states now require that a written accounting of the disposition of the deposit be sent to the tenant within a relatively brief time, usually two to three weeks.  Follow the rule in your state.

            Even if your state does not require an accounting, sending one is an excellent idea, and it will take only a short time to prepare.  The accounting should include a statement of the starting amount of the deposit, a brief description of the work done, the gross charges to the landlord, and the amount actually deducted from the deposit.  For example, let us suppose that the tenant has lived in the apartment for two years, the apartment was freshly painted when he moved in, and it now needs new paint.  You have already established that your interior paint has a life expectancy of three.  The entry on the security deposit accounting might be as follows:  Painting; $150, less two years wear and tear @$50 ea.; total charge to deposit, $50.

            There may be substantial work necessary for which the tenant cannot legally or ethically be charged.  The carpet, say, may be seriously worn in places, but it is eight years old and nearly at the end of what you expected its useful life to be anyway.  Consider including it in the accounting, with an entry of "no charge."  Such an entry might read:  Carpet replacement; $1200, original at end of useful life; total charge to deposit, no charge.  Do not say "$0," say "no charge."  By including entries detailed enough to be fully understood, and making it clear, if it is true, that work was done for which no charge was made, you are letting the tenant know that you have your act together, that you are not charging him for an apartment remodel, and that you are being fair.  The tenant still may not like the fact that the deductions were made, but like it or not, he may think twice about his chances of recovering money from you in court.  Further in this vein, it may be worthwhile, particularly if there are substantial deductions, to include copies of the invoices, so that the tenant can see that these were amounts paid to licensed workmen and, therefore, likely to be trustworthy.

Part 2, Part 3