Security Deposit Protection
Some landlords may assume collecting a security deposit is all the protection a landlord needs against tenant rent default and property damages.
A landlord in developing his security deposit policy will need to determine how much financial protection is really necessary for his business and assess whether a security deposit can actually provide that level of protection. Most likely a landlord will need a comprehensive business risk management policy that includes a security deposit amount adequate to business necessity to fully address potential financial risks.
As review, the purpose of a security deposit is to protect the landlord from damage caused by a tenant. Specifically a landlord may only recover funds from a tenant’s security deposit if the tenant has defaulted on his obligation to pay rent (owes past due rents) and/or the tenant has caused physical damage to the property that is beyond normal wear and tear allowed by statute.
Most states limit the amount of security deposit that may be collected to an amount that is equal to one to two months’ rent. State landlord-tenant statutes may place restrictions upon the use of the security deposit. Most states allow deductions from the security deposit for unpaid rent, damages to the premises except for normal wear and tear, cleaning costs to restore premises to move-in condition, and replacement of missing items removed from the premises by the departing tenant.
All states allow a landlord to collect a security deposit when the tenant moves in and to hold the deposit until the tenant moves out. Security deposits are funds that legally belong to the tenant and remain a credit of the tenant during the tenancy. A landlord is legally accountable to the tenant for use of the security deposit funds.
State landlord-tenant statutes regulate security deposit limits, deadlines for itemization and return of security deposits, and disclosure requirements. The statutes provide clear protections to tenants for the use of their security deposit funds and the return of deposits upon tenant move-out.
Deposit disclosure requirements must usually be in writing. Common disclosures require the landlord to disclose the conditions under which part or all of the security deposit may be withheld and how the deposit is refundable. A landlord may be required to provide a written list of preexisting damage to the rental unit, a copy of inspection orders for the unit, or a list of habitability defects before collecting a security deposit. In most states landlords that require a security deposit must utilize a move-in/move-out property inspection checklist to document the condition of the rental unit at time of tenant move-in and upon tenant move-out.
Not thoroughly understanding the landlord-tenant statutes regarding security deposit requirements for the state where the rental property is located can jeopardize the landlord’s business. Misuse or misunderstanding of security deposit regulations can be a costly mistake for a landlord.
So what are some of the business protections and limitations of a security deposit?
A security deposit as part of the landlord’s rental policies aids in the landlord’s tenant screening and decisioning process. Prospects looking for a new rental can self-qualify themselves for the amount of funds needed at move-in for a particular property. In screening applicants, the landlord will evaluate the applicant’s ability to meet financial obligations including rent, deposits, and allowed fees. A security deposit is considered a significant amount by most renters. A landlord can further discuss with the applicant the importance of meeting lease terms and conditions and how the security deposit collection and return of funds will be handled. The future tenant should understand that the return of his deposit is dependent upon him (tenant) meeting his obligations under lease.
While a landlord usually wants to charge as much as he legally can, market conditions can have a direct impact on the amount he will charge. Generally the larger deposit the tenant has at stake, the more likely the tenant will return the unit in good condition. Without requiring some security commitment from the tenant, the tenant may feel no loyalty or obligation to respect the property and fail to fulfill his responsibilities. The security deposit is often seen as a psychological tool that works to the landlord’s advantage. Additionally, by collecting a larger deposit, the landlord has greater financial protection if the tenant should leave owing rent. However, if still within allowable statutory limits, the security deposit is set too high many potential applicants who otherwise might qualify to rent under the landlord standards may not apply because of the higher move-in costs.
Security deposits provide financial protection to the landlord for minor tenant damage to the property. A security deposit, usually limited to one or two months’ rent, cannot provide protection for major property damage beyond the deposit amount collected. A security deposit does not protect against tenant normal wear and tear on the rental unit. Major property damage by a tenant that exceeds the amount of the security deposit will be the landlord’s responsibility to repair the damage and restore the rental unit to the legal standard of habitability. The landlord will need to take legal action against the tenant to recover the costs of repair.
Tenant rent defaults can cause major financial problems for a landlord that cannot be fully covered by a security deposit. To remove a tenant from the rental unit will require legal eviction, a process that could take several months.
The matter of security deposits should be a straight-forward rental policy developed from state statute, business necessity, and local market conditions. Too often, setting of security deposit amounts and handling of the deposit are taken for granted. If an important detail in the handling and return of deposit funds is missed or not done in a timely manner, there can be serious financial problems for a landlord including the possibility of legal action by the tenant.