Navigating Tenant Lawsuits: Property Managers' Guide to Security Deposit Disputes

The main purpose of the security deposit is to ensure that tenants pay rent on time and keep the rental property in good condition.

This amount, often paid before the lessee takes occupancy of the unit, reimburses the property owner in case of damage or other losses, including when the tenant doesn't pay rent.

However, landlords must handle the security deposit properly. Otherwise, they could violate several laws or tenants' rights and get involved in disputes that could even end up in court.

Essentially, the tenant's security deposit is not the landlord's money. As a property owner, you can use it only if you need to, according to the laws and regulations governing your lease agreement.

Although security deposit laws vary by state and city, generally, the property owner must return the security deposit to the tenants if the unit has not been damaged beyond normal wear and tear and there is no unpaid rent.

Key Takeaways

• Landlords must return the security deposit by the deadline set by each state.
• If there are deductions, property owners must provide tenants with a letter detailing all expenses.
• If tenants moved out more than three weeks ago, paid rent in full, gave proper notice, and passed the move-out inspection but didn't get the security deposit back, they can sue property owners.
• A landlord's failure to return the security deposit could result in a lawsuit and fines.
• Some states may award punitive damages to tenants if landlords acted in bad faith or intentionally defrauded them.
• Laws vary from state to state, but some allow lessees to recover up to three times the security deposit or more.
• Landlords can also sue tenants if the security deposit is depleted.

Why Some States Have Strict Withholding Laws

Landlords must hold the security deposit during the lease term. However, although it may be tempting, they aren't entitled to use it.

In order to protect tenants' rights, many states have set penalties for property owners who keep the security deposit for dishonest reasons. All states require landlords to provide lessees with an itemized list of all charges against this payment.

Some states are stricter than others when it comes to withholding laws. Most give landlords 21 to 60 days to return the security deposit to lessees. However, in Montana, property owners have only 10 days after the tenant vacates the rental unit to return this amount if there are no deductions.

Additionally, other states require landlords to keep the payment in a separate bank account or limit the amount a property owner can charge as a security deposit.

As a result, landlords are highly encouraged to understand the local withholding laws and return the deposit by the deadline set in their state. Otherwise, tenants could sue them.

Can Tenants Sue Landlords for 2-3x the Deposit Amount?

Depending on each state's regulations, landlords may face penalties if they don't handle and return the security deposit properly. If it's against local rent control or related laws, withholding a security deposit could set the stage for a lawsuit.

Tenants could take legal action against property owners and recover up to three times the amount they paid as a security deposit.

However, as mentioned, the laws may vary from state to state. Here's the maximum amount allowed for wrongful withholding in each state:

Maximum Withholding by State

According to the security deposit laws in each state, Florida tenants can only sue landlords for 1x the amount.

However, in the following states, lessees could be awarded 2x the deposit amount:

• Alabama
• Alaska
• Arizona
• Arkansas
• Connecticut
• Delaware

In three US states, tenants may recover 3x the deposit amount if they take legal action against a property owner who violated security deposit laws. These are:

• California
• Colorado
• Georgia

However, as mentioned, these rules may vary. In some states, withholding amounts could exceed 3x the security deposit since landlords are required to return this payment plus $200, for example.

In addition, some states or cities grant punitive damages to tenants if they believe that property owners have acted in bad faith. These cases include landlords who have deliberately defrauded tenants by systematically withholding the security deposit.

Tenants may also receive monetary awards for attorney fees and court costs. Therefore, if you have rented out a property or plan to do so, you should look up your state's laws to avoid legal problems.

Should Landlords Keep Security Deposits in a Separate Account?

As mentioned, some states also require landlords to keep the security deposit in a separate, interest-bearing account. In others, it's advisable under specific circumstances.

Keeping the security deposit in a separate, interest-bearing account helps ensure that landlords don't withhold the security deposit wrongfully.

With these types of accounts, property owners don't tend to use the money for personal purposes. As a result, the sum is there when they must return the security deposit to tenants who move out.

However, it isn't a requirement in some states. In Georgia, for example, landlords must only keep the security deposit in a separate account if they own more than 10 rental units.

Georgia rules also change slightly when a third party manages the property and is responsible for certain tasks, such as rent collection, for a fee.

In this scenario, the security deposit must be kept in an escrow account set for that purpose only. Also, landlords must disclose the location to the tenants.

However, in Delaware, property owners must place the entire security deposit in an escrow bank account, specifically in a federally-insured banking institution with offices in that state.

In some states and cities, there are no requirements at all. This group includes Alabama, Arizona, and Colorado, for example.

Property owners who violate security laws regarding where they must keep this payment may be ordered to pay two or three times the amount to lessees.

Limits on the Security Deposi

In addition to the deadlines and regulations on the accounts where you must keep security deposits, some states limit the amount.

The following states limit the security deposit amount to one month's rent:

• South Dakota
• North Dakota
• Alabama
• Massachusetts
• Hawaii
• Rhode Island
• Delaware
• New Mexico
• Kansas
• Nebraska
• New Hampshire

In four states, the security deposit is limited to one-and-a-half months' rent. These are:

• Michigan
• North Carolina
• Arizona
• New Jersey

In 10 states, a cap has been put on the security deposit, setting the amount at two months' rent. This group includes the following:

• Virginia
• Alaska
• Pennsylvania
• Arkansas
• Missouri
• California
• Maryland
• Connecticut
• Maine
• Iowa

Additionally, these 24 states have not limited the amount that landlords can charge as a security deposit:

• Colorado
• Wyoming
• Florida
• Wisconsin
• Georgia
• Texas
• West Virginia
• Idaho
• Washington
• Illinois
• Louisiana
• Vermont
• Indiana
• Utah
• Kentucky
• Minnesota
• Tennessee
• Mississippi
• South Carolina
• Montana
• Oregon
• New York
• Oklahoma
• Ohio

In Nevada, property owners can charge up to three months' rent as part of a lease or rental agreement.

When tenants have low or no credit, landlords often ask for a larger security deposit. However, they shouldn't charge more than their states allow if they want to avoid legal problems.

Those who violate these rules could be fined. Therefore, as a property owner, you're always advised to require a reasonable amount as a security deposit.

What Landlords Should Consider in Defending Security Deposit Cases

Unfortunately, a landlord-tenant relationship doesn't always end on good terms. Disagreements usually surface when there are issues involving security deposits, which are usually handled in the small claims court.

These disputes often occur when landlords keep all or a large percentage of the security deposit because the property was left in poor condition, but tenants claim owners are wrongfully withholding the amount.

If both parties cannot reach an agreement, tenants have the right to sue landlords for the amount withheld or more. In these cases, the small claims court must review their evidence and judge to decide who is telling the truth.

Therefore, both property owners and lessees must be aware of the security deposit rules. Overall, this is what these laws dictate:

• The maximum amount that landlords can request for the security deposit
• How landlords can use security deposits
• Where should landlords keep the security deposit
• How and when security deposits must be returned

Moreover, in some states, property owners must perform a "pre-move-out inspection" to notify tenants about damages that need to be fixed or if the property needs to be cleaned up to avoid deductions.

In most states, it's up to landlords to prove whether the unit's condition or dirt justified their decision to keep all or part of the deposit.

Generally, tenants must receive the entire deposit back if property owners don't return it before the deadline set by each state's law.

Recommended Steps

Landlords should always consider the time limit set by their state or city. Once the tenant moves out, you can inspect the premises and document any damage or dirt.

After that, sending a written list of deductions for repairs, unpaid rent, and cleaning is essential. As the property owner, you must include details of any repair or cleaning costs, such as hourly charges for tasks done by you or your employees.

If an outside firm worked on the property, you must also provide a written itemization to tenants, detailing all expenses for repairs or replacement. It's important to attach receipts.

Also, if you used outside repair or cleaning services, you can ask the provider if they're willing to testify in court, if necessary, or write a letter describing their work on the property. This can help you defend your case if you receive a demand letter because tenants decided to contest the deposit deductions.

If tenants sue you, you should also prepare to defend your case in court. Therefore, you must collect evidence that the property needs to be cleaned or there is damage to be repaired.

As a landlord, you must prove those facts. Otherwise, the tenant will win and may be awarded three times the security deposit or more. Tenants only need to prove that there was a residential tenancy, they paid a security deposit, and you didn't return the entire amount.

Evidence Landlords Can Use

In order to succeed and win a case, landlords should prepare for the court date by collecting all the evidence possible, including the following documents:

1. Photos or videos of the property, showing that it was clean and undamaged when the tenant moved in
2. Copies of inventory sheets, if prepared, detailing the premises' conditions when the tenant moved in and out (signed by landlords and tenants)
3. Photos or videos taken during the pre-move-out inspection and after the tenant left, showing damage or dirt
4. A copy of the written lease or rental agreement
5. A written itemization of the hours that you or repair/cleaning service providers spent working in the rental unit (with hourly costs)
6. List of all damaged items that can be brought into the courtroom
7. A copy of the security deposit itemization (pre-move-out and post-move-out) with details about the deductions (the one you sent the tenant)
8. Receipts for professional cleaning or repair services
9. Witnesses who were familiar with the property and saw it just after the tenant vacated it or written statements under penalty of perjury

Can Landlords Sue Tenants?

Most of the time, security deposit cases held in the small claims court involve the lessee arguing for the payment return and the landlord explaining why they used the money.

However, occasionally, landlords also sue tenants and show up in the court hearing as plaintiffs. It often occurs when the lessee leaves the property in a damaged or dirty condition that the security deposit doesn't cover.

Most landlords don't go to the small claims court because the disputed amount isn't worth the time, the tenant is "judgment-proof," or they don't expect favorable results.

However, if the amount at issue is significant, landlords may want to file a claim. Therefore, they must prepare their case as plaintiffs by collecting evidence of the damage the tenant caused to the property.

As a property manager, you must prove that you collected a specific amount as a security deposit. If the amount minus proper deductions doesn't cover the legitimate expenses related to the property's cleaning and repair, you could win the case.

However, the judge must review the evidence to determine whether the expenses were necessary or fall into the regular renovation that rental properties need due to normal wear and tear.

Final Thoughts

The security deposit is essential to protect property owners, but it can become a contentious aspect and harm the landlord/tenant relationship.

Therefore, both parties must know and abide by their state's or jurisdiction's real estate rental laws.

Are you a landlord and received a demand letter from your tenant? If you follow the rules, you have a better chance of winning! Also, Doorloop can help you.

Besides having high-quality, expert information on each state's laws, you can find free forms to make the rental process more straightforward. Check our website!