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Handling Security Deposits

As a Residential Property Landlord, you need to be very careful in handling tenant deposits…

Residential leases frequently require the tenant to make a security deposit. Texas Property Code § 92.102 defines a security deposit as any advance of money, other than a rental application deposit or an advance payment of rent, that is  intended primarily to secure performance under a lease of a dwelling. The landlord’s obligation with respect to rental application deposits is discussed below.

The Landlords Duty to Return the Deposit

A security deposit must be refunded by the landlord to the tenant within 30 days after the tenant surrenders the premises; however, the  landlord need not return the deposit until the tenant gives the landlord a written statement of the tenant’s forwarding address for the purpose of refunding the  deposit. If any  deductions are made, the landlord must provide a written description and itemized list of them, unless there were rentals due and unpaid when the tenant surrendered possession of the premises, and there is no controversy over the amount of such rentals. Permissible deductions are those damages and charges for which the tenant is legally liable under the rental agreement or as a result of  breaching the agreement. The landlord may not retain any portion of a security deposit to cover normal wear and tear. Normal wear and tear is defined as deterioration that  results from the intended use of a dwelling, not including deterioration that results from negligence, carelessness, accident, or abuse of the premises, equipment, or chattels by the tenant, a member of the tenant’s household, or a tenant’s  guest or invitee.

A landlord is presumed to have refunded a security deposit or  made an  accounting of security deposit deductions if the refund or accounting  is  mailed and postmarked on or before the required date. However, in an action brought by a tenant to recover a security deposit, the landlord has the burden of proving that the retention of any portion of the deposit was reasonable. A landlord who retains the security deposit beyond the time allowed by the statute and is found to have acted in bad faith is liable to the tenant for $100, plus three times the refundable portion of the deposit, plus reasonable attorney’s fees.

The test for bad faith is whether the landlord acted in  dishonest  disregard of the rights of the tenant, implying an intention to deprive the  tenant of the refund lawfully due. The mere fact that the  deductions from the  security deposit were unreasonable is insufficient. Similarly, the fact that the landlord  retained the security deposit  based on the tenants’ failure to comply with an advance notice of surrender provision that did not meet the statutory requirements of being underlined or in conspicuous bold print did not constitute dishonest disregard of the tenants’ rights. On other hand, in one case a court held that evidence that a landlord retained the deposit after the landlord’s property manager induced a tenant to return to clean the apartment by promising to return the deposit constituted sufficient evidence to support a jury finding that the landlord acted in dishonest disregard of the tenant’s rights, intentionally depriving the tenant of the refund. A landlord’s  suggestion that he or she would refuse to refund the deposit unless the tenant agreed to renew the lease on the terms proposed by the landlord could  be interpreted by a jury as a willful act of coercion that would constitute bad faith on the landlord’s part.

The correctness of the retention of the deposit notwithstanding, the failure of  the landlord to render the required accounting to the tenant may result in the  landlord’s forfeiture of the right to withhold any funds or sue the tenant for any damages. This result follows a finding that the landlord’s failure to account was in bad faith. In  addition, a landlord who is guilty of a bad faith failure to account is liable for the tenant’s reasonable attorney’s fees in a suit by the tenant to recover the deposit.

A landlord who fails to return the deposit or to provide a written description and itemization of deductions within 30 days is presumed to have  acted in bad faith. In the absence of rebutting evidence, this presumption compels a finding of bad faith, as a result of which the landlord forfeits all rights to withhold any portion of the security deposit or to bring suit against the tenant for damages. The rebutting evidence must provide an excuse for the delay in  returning the deposit or providing an accounting, not a justification for retaining the deposit.

The duty to refund the deposit may be conditioned on the tenant’s giving advance notice of the surrender of the premises. However, such  a condition is valid only if underlined or printed in conspicuous bold print in the rental agreement. This requirement applies to the entire provision requiring the advance notice, not  just the title of the provision or a few key words.

Conversely, the duty to refund or account for the deposit is not conditioned on the statutory requirement that the tenant furnish the landlord  a forwarding address. Although the failure to furnish such an address will prevent the tenant from recovering  damages and penalties for the landlord’s bad faith retention of the deposit, the failure does not forfeit the tenant’s right to the refund or accounting. Once the tenant has given written notice of a forwarding address, the landlord has 30 days within which to return the deposit or provide an accounting, after which the tenant may bring suit under Section 92.109 of the Texas Property Code.

Refund Obligation of the Landlord When Replacement Tenant Secured

A tenant who leases a dwelling may give the landlord a  security deposit or rent advance, and then fail to occupy the dwelling. The landlord may not keep the deposit or advance if either the landlord or the tenant secures a replacement tenant satisfactory to the landlord on or before the commencement date of the lease. If the landlord secures the replacement tenant, the landlord may retain certain funds. The landlord is entitled to either (1) a sum agreed to in the lease as a lease cancellation fee; or (2) actual expenses incurred by the landlord in securing the replacement. This amount includes a reasonable amount for the time of the landlord in securing the replacement tenant.

Landlord’s Duty to Refund Rental Application Deposit

A rental application deposit is a sum of money that is given to the landlord in connection with a rental application and that is refundable to the applicant if the applicant is rejected as a tenant.  The applicant is deemed rejected by the landlord if the landlord does not give notice of  acceptance of the applicant on or before the seventh day after (1) the date the applicant submits a completed rental application to the landlord on an application form furnished by the landlord; or (2) the date the landlord accepts an application deposit if the landlord does not furnish the applicant an application form. A landlord’s rejection of one co-applicant is a rejection of all co-applicants.

Generally, a landlord who telephones notice of an applicant’s acceptance or rejection of the notice to applicant, co-applicant, or a person living  with the applicant or co-applicant on or before the required date is presumed to have given the required notice. Mailing a notice addressed to the  applicant postmarked on or before the required date also satisfies the notice requirement. If a rental applicant requests that any acceptance or refund of the applicant’s application deposit be mailed to the applicant, the landlord must mail the refund check to the applicant at the address furnished by the applicant. If the date of required notice of acceptance or required refund of an application deposit is a Saturday, Sunday, or state or federal holiday, the required date shall be extended to the end of the following day.

A suit to recover the deposit may be brought against the landlord. A landlord who in bad faith fails to refund the deposit is liable for an amount  equal to the sum of $100, three times the amount of the application deposit, and the applicant’s reasonable attorney’s fees.

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