WHAT YOU DON’T KNOW ABOUT SECURITY DEPOSITS CAN HURT YOU

Posted by admin on Jan 22, 2014 in YouBuyHouses Blog | 0 comments

Recently I have had a couple of conversations with clients that made me realize that many Investors need a refresher course in security deposit rules. As always the advice and information in this article is Ohio specific and readers in other States should consult an attorney familiar with their State’s laws.

What is a security deposit? Why would I even think I needed to address such an obvious question? Am I just filling space here? A security deposit seems like an obvious thing but in the world of modern property investing it is not as clear as you might think. Land Contracts, which I have discussed previously, have a down-payment, Lease Options have an Option Fee, even Leases sometimes contain provisions concerning Pet Deposits, which may or may not qualify as a security deposit. Many landlords end up very confused by all of this; they are used to collecting money at the start of a tenancy and they do not always differentiate between the security deposit and other money collected.

Why does it matter? Money is money right? Well, no, there is one major distinction between types of money that applies here, the most basic one of all; the distinction between your money and NOT your money. A security deposit does NOT belong to the landlord. The landlord gets it when the tenant moves in, and as we all know the landlord often keeps it after the tenant leaves the property, but in between that money actually belongs to the tenant.

The down-payment in a Land Contract, the Option Fee in a Lease Option, and even the Pet ‘Deposit’ in a lease (assuming it specifies that it is nonrefundable) all belong to the landlord from the moment they are paid. A security deposit is only held by the landlord, it must be either returned to the tenant at the end of the lease, or applied to amounts owed by the tenant to the landlord, and then accounted for. Landlords who do not return security deposits, or properly account for them, can be forced to pay double the amount of the security deposit, plus attorney fees, to the tenant.

Ohio Revised Code 5321.16 governs security deposits

(A) Any security deposit in excess of fifty dollars or one month’s periodic rent, whichever is greater, shall bear interest on the excess at the rate of five per cent per annum if the tenant remains in possession of the premises for six months or more, and shall be computed and paid annually by the landlord to the tenant.

(B) Upon termination of the rental agreement any property or money held by the landlord as a security deposit may be applied to the payment of past due rent and to the payment of the amount of damages that the landlord has suffered by reason of the tenant’s noncompliance with section 5321.05 of the Revised Code or the rental agreement. Any deduction from the security deposit shall be itemized and identified by the landlord in a written notice delivered to the tenant together with the amount due, within thirty days after termination of the rental agreement and delivery of possession. The tenant shall provide the landlord in writing with a forwarding address or new address to which the written notice and amount due from the landlord may be sent. If the tenant fails to provide the landlord with the forwarding or new address as required, the tenant shall not be entitled to damages or attorneys fees under division (C) of this section.

(C) If the landlord fails to comply with division (B) of this section, the tenant may recover the property and money due him, together with damages in an amount equal to the amount wrongfully withheld, and reasonable attorneys fees.

Now that I have scared all the landlords reading this, and then confused you with a big block of statute let me offer some clarity. First Paragraph A of the statute is pretty simple. It is the reason almost all security deposits are one month’s rent. You can collect less than one month’s rent as a security deposit if you want without having to do anything special, but if you collect more than one month’s rent you have to pay the tenant 5% interest on the amount over one month’s rent.

OK, so your security deposit is one month’s rent, your tenant has just moved out, and you do not want to have to pay the tenant damages, in fact you want to collect damages from the tenant. How do you do this? It is pretty simple. First remember that you only have 30 days to do this, so start as soon as the unit goes vacant (which is good practice anyway since the most costly mistake most landlords make is letting turnover time get out of control).

Go to the unit or have the manager do so, itemize a list of repairs that need to be made (again, you have to do this anyway to turnover the unit.) Next to each repair on that list make a note of whether it is tenant damage in excess of normal wear. Sorry landlords you cannot charge the tenant for normal wear or for damages that were not the tenant’s fault. Now that you have your list, do the work, or have it done and mark the cost next to each item. Now you are ready to prepare the accounting and write a letter to the tenant at their new address.

What? You say that your tenant moved out in the dead of the night and you have no idea where they are? Good news, you are theoretically off the hook. Paragraph C of the statute (they ugly part where you could be stuck paying twice the deposit to the tenant) only applies if the tenant has properly given you the new address. Unfortunately, my picky lawyer ways won’t let you off the hook that easily. Prepare the accounting anyway!

The reason I want you to prepare the accounting anyway is that the scenario above, where you do not know where your tenant has moved, is very common. If you do not prepare the accounting in these cases you will almost certainly forget to do it when it is needed and eventually it will bite you. If, on the other hand, you make it a habit to always take the 5 minutes needed, you will be safe when you have a tenant who does give you a forwarding address.

The accounting does not need to be anything complicated:

Larry Landlord, LLC
123 Office CT
Erewhon, Ohio 45000

November 30, 2013

Re: Security deposit Tom Tenant 456 Property Pl. Erewhon, Ohio

Dear Tom Tenant,

This letter is concerning your tenancy at 789 Rental Way, Erewhon, Ohio 45000 and the security deposit in the amount of $800.00 held by Larry Landlord, LLC. The following charges were paid from that deposit:

$200 past due rent for October 2013
$50 for broken window in bedroom
$250 for damage to drywall in living room
Total reductions $500

This leaves a balance of $300 a check for which is enclosed.

Thank You,

Larry Landlord, Manager, Larry Landlord, LLC

Obviously your letter will look a bit different if there were no damages or if the damages exceed the security deposit and you are demanding payment, but in all cases you should prepare this letter, keep a copy, and send a copy to the tenant at their new address. If you do not have a new address for the tenant I suggest sending the letter to the rental property. If they have placed a forwarding order with the Post Office you should be notified of the new address. Do not send the check unless you have a new address for the tenant. If they are due a refund and you have no address, send the letter but add a line asking for an address to which they want you to send the money.

I suggest doing a move out walkthrough with those tenants who let you know they will be leaving. This allows a perfect opportunity to ask about the new address, as well as allowing you to point out the damages and reduce disputes.

James Flax, Esq.