When the Tenant’s Security Deposit Isn’t Enough

What are the landlord’s options if the tenant’s security deposit is insufficient to cover costs of property repairs due to tenant damage, cleaning the rental unit, and tenant unpaid rent?

The purpose of a security deposit is to provide the landlord with funds owed by the tenant if the tenant fails to pay rent as agreed, keep the rental unit in clean and sanitary condition, or causes property damage beyond ordinary wear and tear.

State statutes regarding security deposit vary significantly among states. Many states address issues of security deposit limits, deadlines for itemization and return of security deposits, and disclosure requirements as required by statute for a separate holding account including interest rate and interest payment. A landlord is legally accountable to the tenant for use of the security deposit funds.

Once the landlord and tenant have conducted the move-out inspection, the landlord must prepare a written security deposit statement of accounting, itemization, and explanation of deductions from the security deposit. A landlord cannot charge the tenant for damage that was evident at tenant move-in, replacing an item when a repair would be sufficient, or cleaning when the tenant paid a non-refundable cleaning fee. If repairs or cleaning cannot be performed within the time required by statute to return the security deposit, a reasonable estimate of costs can be made. When work is performed, the receipts must be for an amount at least as much as the amount deducted.

A reasonable approach for the dollar amount charged as damages is to determine whether the tenant has shortened the useful life of an item that will wear out. If the tenant has damaged or shortened the item’s useful life, the landlord may charge the tenant for the prorated cost of the item based upon cost of the item, the expected useful life, and replacement cost.

If the tenant has satisfactorily performed to his lease terms and conditions, the landlord must return the full amount of the deposit to the departing tenant. When the landlord determines that deductions from the deposit are required for cleaning to return the rental unit to good condition, or required to repair tenant damage to the unit, the security deposit statement will itemize those deductions, showing the amount and description of each type of deduction. In the letter accompanying the accounting statement, the landlord should provide the former tenant with details on the total amount the landlord owes the tenant or the total amount the tenant owes the landlord. The landlord will remit the amount due the tenant with the accounting letter or the landlord’s letter will request the tenant to immediately remit the balance due to the landlord.

The tenant may respond to the accounting statement by challenging the deductions from his security deposit. Many of the disagreements between a landlord and tenant stem from the handling and accounting of the security deposit. If a tenant strongly believes the landlord’s deductions were in error or unreasonable, a tenant may choose to take legal action against the landlord. The landlord’s best course of action when a tenant disagrees with the deposit accounting may be to reach an acceptable compromise with the former tenant regarding the deductions and the balance due. As a practical matter a compromise may be the better business decision depending upon the amount and time that would be required to defend against the matter in court and evidence regarding which party is right. If the landlord and tenant cannot reach a satisfactory agreement between them, they could consider using a mediation service. If the landlord and tenant settle a security deposit dispute through a compromise on the tenant’s claim for return of the security deposit, the landlord should document in writing that the agreed upon sum of XXX is the tenant’s acknowledgment of full satisfaction of the tenant’s claim.

If the tenant does not respond to the landlord’s request for payment, or refuses to pay the amount due, the landlord may take legal action to collect the money owed him. The question that the landlord must ask himself: “Is the amount due the landlord an amount worth the landlord’s time, effort, and expense to pursue collection?”

Before rushing to file suit in court, a landlord should write a formal demand letter to the former tenant requesting payment of the past due balance. A copy of the security deposit statement and a copy of the statement’s cover letter that was provided to the tenant at move out should be enclosed with the demand letter. The demand letter should state the facts clearly, set a deadline for payment, and advise that a lawsuit will be filed in small claims court if an understanding and resolution cannot be accomplished by the deadline. In some states the landlord’s written demand letter for payment is a requirement by statute before a landlord can file in small claims court.

The maximum small claims court limit varies significantly among states. A landlord should confirm the applicable state’s jurisdictional amount before deciding to file to be sure the claim will not exceed the court’s limit. It may be a better business decision to adjust the amount of the claim to scale it down to fit the court limit.

The landlord’s decision to sue may be dependent upon whether the landlord has a strong case, knows how to locate the former tenant for required service, and the landlord’s chances of collecting a judgment if the landlord wins.

Most landlords will have a strong case against a former tenant who now owes money for repairs, cleaning, and rent. Experienced landlords know to keep detailed records on the costs of cleaning and repairs, including all receipts for materials, labor, and services performed by third party contractors or service companies. If the landlord or his employees perform any of the required work to return the unit to good condition, the same type of detailed record keeping applies to in-house cleaning, maintenance and repair work. Documentation in the tenant’s file and available for use in proving the landlord’s case could be photos or videos of the condition of  the rental unit at tenant move in and move out,  a copy of the tenant signed move in and move out inspection checklist, maintenance and repair logs for the rental unit, detailed work logs of cleaning and repair performed by the landlord or his employees including itemization of number of hours and reasonable labor costs associated with the cleaning and repairs, written statements of the condition of the unit by third party vendors contracted for cleaning and repairs, or witnesses to the physical condition of the unit at move in and move out who can testify to the need for cleaning and repair.

If legal action is taken by the landlord in a timely manner, the landlord may have a forwarding address for the former tenant, has knowledge of the former’s tenant work address, or may use the tenant’s contact information to obtain an address that could be used for court service of legal papers.

A somewhat more difficult decision for the landlord is the timing of a lawsuit. If the tenant left owing months of past due rent, the former tenant may have financial difficulties that now make him insolvent, bankrupt, or otherwise judgment proof. Being awarded a money judgment does the landlord no good if the judgment cannot be collected. However in most states a money judgment is good for ten years, with possible extensions thereafter, and the former tenant’s financial situation could change for the better, allowing the landlord a good chance to collect his money. Often the debtor will be motivated to pay the judgment, including the interest allowed by statute, in order to obtain a loan from a bank.

A landlord should research applicable law to determine the statutory timeframe for filing suit on a landlord-tenant related issue in small claims court. The landlord may need to postpone filing in small claims court until a future date because the tenant cannot be located once he has vacated the rental unit. It may require some investigative work to discover a new home or work address for the former tenant in order to comply with notification and court service of legal papers to the former tenant.

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