Security deposit disputes are high-frequency, high-risk situations for property managers. In fact, as many as 30% of rental disputes are over security deposits. They impact compliance, profitability and day-to-day operations. Further, disagreements over deposits account for a large percentage of small claims court cases between landlords and tenants.
This article explores ways to avoid security deposit disputes and offers sample language you can adapt to fit your lease templates.
Key points
- Understanding specific state laws
- Setting clear expectations in the lease
- Documenting property conditions thoroughly
- Separating & tracking deposits properly
- Communicating & providing notice
1. Understand specific state laws
Know your state laws inside and out, and work with your attorney to set clear, enforceable guidelines. Show your tenants the connection between the law and your policies. Spell out pertinent information in the lease or additional explainers made with the help of your legal counsel.
Some states, such as California, offer guidance around security deposits. Property managers may be required to provide receipts for charges, provide refunds within a set period of time and keep late fees reasonable. The tricky part comes when the guidance is vague.
2. Set clear expectations in the lease
Unclear security deposit terms have led to class action lawsuits with multimillion dollar settlements. To avoid this, Yardi Breeze allows you to include clear security deposit terms in digital leases. Tenants can access these terms anytime through their resident portal, reducing misunderstandings and empowering tenants through transparency.
3. Document property conditions thoroughly
If you aren’t properly documenting and communicating on a regular basis with tenants about the condition of their rental, tenants may feel blindsided if their deposits are not returned. Particularly during the move-out inspection, this is the time to note damages, assess issues beyond normal wear-and-tear and communicate expectations clearly. In most cases, if it doesn’t come up during the inspection, it shouldn’t come up in a fees assessment.
How Breeze makes this easier: You can upload photos and inspection notes directly into the system. This creates a timestamp to permanently record property condition, which is critical for justifying deductions, proving what was done and whether the tenant signed off.
4. Separate & track deposits properly
Refund delays and lost checks create extra costs. For example, stop-payment and reissue fees for unclaimed checks can add up to thousands annually for property management firms.
The easiest way to avoid these situations is to practice proper trust accounting. Security deposits should be kept in a bank account distinct from the landlord’s money. This helps prevent misuse and ensure legal compliance. These deposits are the tenant’s money until rightfully claimed for damages or unpaid rent.
Likewise, return deposits on time. The sooner you get tenants their money, the happier they’ll be. They might even be willing to write you a review. You definitely want future renters to know you have a history of refunding fees promptly.
Fast turnarounds in refund processing will avoid legal consequences for late returns in states with security deposit regulations.
How Breeze helps: Security deposits are tracked in compliance with state laws. For instance, the system knows that California property managers have a 21-day window to return deposits after move-out. Breeze automatically separates deposits from operating funds and makes it easy to generate reports for audits.
5. Communicate & provide notice
Property management software is the best communication tool at your disposal. Everything sent and received via text or email gets stored permanently in the cloud. Built-in messaging and document-sharing features keep all conversations in one place. Tenants can quickly access charges and ask questions through the portal, reducing friction and potential disputes.
How to include security deposit language in residential leases
Important information to include
- Establish purpose of the security deposit
- Restrict using the deposit as final month’s rent
- State the deposit will be returned with itemized statement
- Set expectation that tenant will return keys and leave the unit clean
- State that property manager will secure funds according to state law
Sample: Security deposit lease amendment template
The tenant shall pay a security deposit in the amount stated in this lease. The deposit is held to cover unpaid rent, damage beyond normal wear and tear and any other charges permitted under applicable state law. The landlord will provide an itemized statement of deductions along with any required receipts or documentation.
The remaining balance, if any, will be returned to the tenant within the time period required by state law. The security deposit will not be used for the last month’s rent. The tenant agrees to leave the property in clean condition and return all keys, fobs and access devices. Failure to do so may result in allowable deductions.
The landlord will maintain all deposit funds in accordance with state requirements and will provide any required notices related to where and how the deposit is held.
Other information
- State-specific disclosures
- Definition of “normal wear and tear”
- Specific timetables for returning funds
- Details on how you conduct inspections
- Other information suggested by your attorney
Frequently asked questions
What happens if a security deposit is not returned on time?
If a security deposit is not returned in a timely manner according to state law, the property manager may end up having to pay more than the deposit. This may also result in you being unable to claim any damages. Protect yourself by keeping clean records and taking prompt action to assess fees and return funds.
What happens if a renter denies they caused damages?
Be prompt and document everything. This is where communication and record-keeping come into play. The move-in and move-out inspection reports are crucial. They contain written and photo evidence of the property’s condition. Anything beyond normal wear and tear may be an eligible reason to assess a fee. It’s also important to itemize your receipts, so renters can see that you are charging what you paid for the repair.
Is mediation better than going to court?
Mediation is often a better way to resolve issues than going to court. It is less expensive, faster and shows good faith from both parties. Mediation is also private, which can preserve your reputation.
Can property managers keep unclaimed security deposit funds?
No, there is no circumstance where a property manager may legally take ownership of security deposit funds marked for reimbursement. Laws vary by state, but property managers must document their efforts to return funds due to tenants. If the tenant cannot be reached after an extended period (generally three to five years), unreturned funds must be transferred to the state government in a process known as escheatment. At this point, the deposit will no longer be the responsibility of the property manager, and funds can be recovered by the tenant or heirs of their estate.
Disclaimer
Please note that this article is for informational purposes only and does not constitute or replace legal advice. To ensure compliance, always follow state law and consult your attorney when writing a lease.
