Return Of Security Deposit

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company

Earlier this week I had to intercede on behalf of a column reader in a silly situation.  This involved a little ignorance and a lot of “lack of communication”.  It appears this person had rented a house some years ago and thought she had paid the “last month’s rent”.  They had recently given the landlord a short notice (ten days) that they were leaving.  They had expected to receive most of their “last month’s rent” back as a pro-ration during the last month.  These renters were shocked, upset and bitter when the landlord informed them that the rent was, in fact, a security deposit and that a full month’s rent was due for January.  A screaming match then developed with threats of evictions and lawsuits.

If either the landlord or the tenant had gone to see an attorney, the attorney would have asked for any lease or rental agreement.  In this case there was a written rental agreement dating back several years.  That rental agreement was still in force and effect.  Though the tenant “believed” that she had paid last month’s rent, the actual agreement acknowledged the receipt of a “security deposit” and, in fact, was not rent.  The security deposit clause allowed the landlord to deduct any unpaid rent from the security deposit, but did not allow the tenant to use the security deposit as rent.  The rental agreement definitely required a 30-day WRITTEN notice and the landlord was indeed entitled to rent for the full month of January.  Fortunately this potential spat never got to the attorney stage as it was worked out with a couple of calm third party phone calls.

Modern landlords do not allow a deposit to be called “last month’s rent”.  That was a popular way to rent residential property decades ago, but was and is unwise for both landlord and tenant purposes as well as income tax purposes.  If the last month’s rent is actually collected in advance it is taxed as rent received in the year it is collected.  A security deposit is not taxed when received and is theoretically returned with no tax implication.  Tenants often forget that the true purpose of a security deposit is for a landlord’s security.  This deposit will cover most minor damages, including carpet stains, unclean appliances, small holes, tears, etc.  If a tenant’s security deposit were credited as last month’s rent, the landlord would have no “security” to cover miscellaneous damages.

Most reasonable smaller landlords know that the tenant needs the security deposit back as soon as possible after the tenant vacates the property.  I am friendly with one landlord who meets the tenant at the property and literally refunds the full security deposit in exchange for the keys after a walk-thru inspection.  In the event that there are minor damages, the landlord points the damages out and deducts an estimate of the repairs with the tenant’s written approval. In the event that the tenant does not approve of the deducted amount the landlord arranges for the work to be done and refunds any security deposit balance within the 21 days required by law.

A spat with your landlord is usually a “no win” situation as you may win a small battle but actually lose the war.  As I have stated in the past, if you are having a real problem with your landlord find a knowledgeable friend to intercede on your behalf and try to smooth over the issue by communication rather than “armed conflict”.

Peter Rosenthal
VIP Trust Deed Company