Real estate investors who are new to being residential landlords are advised to acquaint themselves with rules concerning security deposits, particularly since the Property Code declares that a landlord is presumed to be acting in bad faith if an accounting is not timely and properly given for these funds. Bad faith in this context triggers a $100 statutory penalty and the recovery by the tenant of treble damages plus attorney’s fees. And, of course, whenever a law provides for the award of attorney’s fees, the door is opened to contingent-fee arrangements with plaintiffs’ attorneys. An aggrieved tenant may pursue an investor at no cost to himself and is even granted the equivalent of preferred creditor status: “The tenant’s claim to the security deposit takes priority over the claim of any creditor of the landlord, including a trustee in bankruptcy” (Prop. Code Sec. 92.103(c)).
Landlord’s Obligation to Refund and Provide Accounting
Chapter 92, Subchapter C of the Property Code contains requirements pertaining to landlord refund and accounting for residential security deposits. It states in part:
Prop. Code Sec. 92.103. OBLIGATION TO REFUND
(a) Except as provided by Section 92.107 [failure by tenant to give a written statement of forwarding address], the landlord shall refund a security deposit to the tenant on or before the 30th day after the date the tenant surrenders the premises.
Prop. Code Sec. 92.104. RETENTION OF SECURITY DEPOSIT; ACCOUNTING
(a) Before returning a security deposit, the landlord may deduct from the deposit damages and charges for which tenant is legally liable under the lease or as a result of breaching the lease.
(b) The landlord may not retain any portion of a security deposit to cover normal wear and tear.
(c) If the landlord retains all or part of a security deposit under this section, the landlord shall give to the tenant the balance of the security deposit, if any, together with a written description and itemized list of all deductions. The landlord is not required to give the tenant a description and itemized list of deductions if: (1) the tenant owes rent when he surrenders possession of the premises; and (2) there is no controversy concerning the amount of rent owed.
Prop. Code Sec. 92.106. [LANDLORD’S] RECORDS. The landlord shall keep accurate records of all security deposits.
The statutory requirement is only that the landlord keep an accurate record when it comes to security deposits. Does this require that the landlord maintain a segregated bank account for security deposits? Probably not but doing so is an excellent idea.
Sending the Accounting
The usual Texas mailbox rule applies which is a bit of good news for the landlord:
Prop. Code Sec. 92.0141. PRESUMPTION OF REFUND OR ACCOUNTING. A landlord is presumed to have refunded a security deposit or made an account of security deposit deductions if, on or before the date required . . . the refund or accounting is placed in the Unites States mail and postmarked on or before the required date.
It would be imprudent for a landlord to wait until the last minute to send a security deposit accounting and risk being late and in presumptive bad faith. In most cases, unless there are extensive repairs to be made, there is no good reason for a competent landlord to delay sending an accounting by more than ten days or so.
If the tenant seeks relief in court, the burden will be on the landlord to demonstrate the reasonableness and necessity of security deposit deductions:
Prop. Code Sec. 92.109. LIABILITY OF LANDLORD
(b) A landlord who in bad faith does not provide a written description and itemized list of damages and charges in violation of this subchapter: (1) forfeits the right to withhold any portion of the security deposit or to bring suit against the tenant for damages to the premises; and (2) is liable for the tenant’s reasonable attorney’s fees in a suit to recover the deposit.
(c) In an action brought by a tenant . . . the landlord has the burden of proving that the retention of any portion of the security deposit was reasonable.
(d) A landlord who fails either to return a security deposit or to provide a written description and itemization of deductions on or before the 30th day after the date the tenant surrenders possession is presumed to have acted in bad faith [italics added].
Bad faith on the part of the landlord is presumed according to Section 92.109(d) if the required accounting is not sent within 30 days. “A landlord shall have 30 days from the tenant’s furnishing of a forwarding address to refund the deposit or provide an itemization of damages before the presumption of bad faith will arise.” Ackerman v. Little, 679 S.W.2d 799, 75 (Tex.App.—Dallas 1984, no writ).
Presumptions, however, may be rebutted. Being given the burden of proof does not mean that the landlord will always lose, but it will be an uphill battle if a court finds evidence that the landlord acted intentionally and with dishonest disregard of a tenant’s rights. Southmark Mgmt. v. Vick, 692 S.W.2d 157 (Tex.App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.).
Being unreasonable or arbitrary raises the prospect of a finding of bad faith. “A landlord acts in bad faith when he retains the security deposit in dishonest disregard of the tenant’s rights. Bad faith implies an intention to deprive the tenant of a lawfully due refund. Absent rebutting evidence, the presumption that the landlord acted in bad faith compels a finding of bad faith.” Pulley v. Milberger, 198 A.Q.3d 418, 428-29 (Tex.App.—Dallas 2006, pet. denied).
What constitutes rebutting evidence? If the landlord reasonably believed he had the right to retain a security deposit then that can rebut a finding of bad faith; so can the fact that the landlord was inexperienced and not fully informed on the law. Johnson v.Waters at Elm Creek L.L.C. 416 S.W.3d 42, 47-48 (Tex.App.—San Antonio 2013, pet. denied).
Consequences of Bad Faith
A finding by the court that a landlord acted in bad faith will likely result in a judgment for treble damages plus attorney’s fees:
Prop. Code Sec. 92.109(a). A landlord who in bad faith retains a security deposit in violation of this subchapter is liable for an amount equal to the sum of $100, three times the portion of the deposit wrongfully withheld, and the tenant’s reasonable attorney’s fees in a suit to recover the deposit.
Additionally, the landlord “forfeits the right to withhold any portion of the [tenant’s] security deposit or to bring suit against the tenant for damages to the premises. . . .” (Prop. Code Sec. 92.109(b)(1)).
Tenant Forwarding Address
The tenant is obligated to provide a forwarding address in writing. If the tenant fails to provide such an address, the right to an accounting and refund is not forfeited; it is merely delayed:
Prop. Code Sec. 92.107. TENANT’S FORWARDING ADDRESS
(a) The landlord is not obligated to return a tenant’s security deposit or give the tenant a written description of damages and charges until the tenant gives the landlord a written statement of the tenant’s forwarding address for the purpose of refunding the security deposit.
(b) The tenant does not forfeit the right to a refund of the security deposit or the right to receive a description of damages and charges merely for failing to give a forwarding address to the landlord.
Accordingly, the landlord’s obligation to supply a written description of damages does not arise until a tenant provides a forwarding address. So should a landlord wait passively to act even if no forwarding address is received? No. The best practice is for the landlord to timely send the accounting and any refund check (by certified mail, return receipt requested) to the tenant at the rental property address. If the letter is forwarded to the tenant’s new address, fine; if it comes back undelivered, then the landlord should retain the letter, unopened, as evidence of a good faith effort to comply with the statute.
Tenant’s Notice of Surrender
Can a lease provide that a tenant must give advance notice of surrender as a condition for refunding the security deposit? Yes, so long as the lease provision is underlined or is printed in conspicuous bold print (Prop. Code Sec. 92.103(b)). If utilizing such a clause, it is recommended that it be both underlined and set in bold 14-point type.
Tenant Substitution of Security Deposit for Final Month’s Rent
This is expressly prohibited by Property Code Section 92.108(a): “The tenant may not withhold payment of any portion of the last month’s rent on grounds that the security deposit is security for unpaid rent.” Doing so makes the tenant vulnerable to a finding of bad faith—and yes, that means treble damages plus attorney’s fees in favor of the landlord. The reality, however, is that this remedy is seldom granted. Even when it is, the vast majority of residential tenants are judgment-proof and it is usually a waste of time and money to pursue collection.
Landlord’s Sale of the Rental Property
What if rental property is sold to another real estate investor? Who is liable for an existing deposit under the Property Code?
Section 92.105(a) states that “the new owner is liable for the return of security deposits . . . from the date title to the [rental property] is acquired. . . .”
Section 92.105(b) provides, however, that the selling landlord “remains liable for a security deposit received while [the selling landlord] was the owner until the new owner delivers to the tenant a signed statement acknowledging that the new owner has received and is responsible for the tenant’s security deposit and specifying the exact dollar amount of the deposit.”
Such a signed statement—with language precisely tracking the statute—should be prepared as part of the closing package. The selling landlord should ensure that it is delivered to the tenant even it means doing so himself. Otherwise, the selling landlord may have continuing liability for both the accounting statement and the return of the security deposit.
Receipt and Release
Security deposit disputes should generally be avoided by landlords. Although Texas is a business-friendly state, parts of the Property Code are stacked against real estate investors (the law on executory contracts comes to mind) and this includes provisions relating to security deposits. If an argument over a deposit can be settled reasonably, it should be and quickly. As in any situation where a dispute is resolved by means of a settlement check, the landlord should get both a written receipt and (if feasible) a full and complete release in return.
Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.
Copyright © 2023 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, http://www.LoneStarLandLaw.com.