Investors who are new to the business of being residential landlords would be best advised to acquaint themselves with the 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. This means that the usual cost-benefit analysis which potential plaintiffs must perform (Is this litigation going to be worth the expense?) does not apply. An aggrieved tenant may pursue an investor at no cost to himself. He 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.” Tex. Prop. Code § 92.103(c).
Chapter 92, Subchapter C of the Property Code contains requirements pertaining to landlord accounting for and refunding of security deposits. It states in part:
§ 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.
§ 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.
§ Sec. 92.106. RECORDS
The landlord shall keep accurate records of all security deposits.
§ 92.109. LIABILITY OF LANDLORD
(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.
(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 under this subchapter, 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
Accounting for Security Deposits
The statutory requirement, as stated above, is only that the landlord keep an accurate record when it comes to security deposits. Does this require the ability to produce an Excel spreadsheet?
Is a segregated bank account required? The answer is no to both questions, at least as to legally required minimums, but both ideas are nonetheless good ones and are recommended for the professional investor.
Reasonableness and Bad Faith
The burden is on the landlord to demonstrate the reasonableness of any deductions. Unreasonable deductions raise 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). Given the potential consequences, this is not an issue to be taken lightly.
Bad faith on the part of the landlord is presumed according to sec. 92.109(d) if the required accounting is not sent within 30 days. Although the usual Texas mailbox rule applies (the letter is considered sent when deposited in the U.S. Mail per sec. 92.1041) it is imprudent to wait until the last minute and risk being (even arguably) late and therefore in presumptive bad faith. In most cases, there is no good reason for a competent landlord to delay sending out an accounting past ten days after surrender of the premises.
The Requirement of a Tenant Forwarding Address under Sec. 92.107(a)
The tenant is obligated to provide a forwarding address in writing (Tex. Prop. Code § 92.107(a)). Note that even if the tenant fails to provide such an address, the right to an accounting and refund is not forfeited; it is merely delayed. This same section makes it clear that the landlord’s obligation to supply a written description of damages does not arise until a forwarding address is provided. So should the landlord passively wait until a departed tenant gets in touch? We suggest not. Our recommendation to a landlord who has no forwarding address is to timely send the accounting (together with any refund check) to the tenant at the address of the rental property, by certified mail with return receipt requested. It may come back, it may not; but this is an excellent way to avoid a later finding of bad faith. An investor should always be prepared to demonstrate good-faith compliance with a statute, particularly this one, even if that occasionally means walking the extra mile.
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. Tex. Prop. Code § 92.103(b). If utilizing such a clause, we recommend 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 sec. 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 for the landlord. The reality, however, is that this is seldom granted. The vast majority of residential tenants are judgment proof, and it is usually a waste of time and money to pursue them. Which does not mean that the investor should not look at each circumstance case by case, before writing it off.
Landlord’s Sale of the Rental Property
What if the investor sells the property to another investor? Who is liable for a deposit under the Code? Unless proper notice is given to the tenant, both seller and buyer may be liable. Section 92.105(a) states flatly that “the new owner is liable for the return of security deposits . . . from the date title to the premises is acquired. . . .” So how does the seller get off the hook? Section 92.105(b) addresses this, providing that the seller “remains liable for a security deposit received while the person 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 therefore be prepared along the warranty deed and any other transfer paperwork, and the seller should insure that it is delivered to the tenant. Otherwise, the seller may remain liable for both the accounting for and return of the security deposit, with all the attendant risks of a potential finding of bad faith.
By now, it should be apparent that security deposit disputes are generally to be avoided by landlords. Although Texas is generally a business-friendly state, parts of the Property Code are stacked against the investor (the section on executory contracts comes to mind) and this includes provisions relating to security deposits. If an argument over a deposit can be settled reasonably by a landlord, it should be, and quickly. Write off the loss and live to fight another day. And, as in any situation where a monetary dispute is resolved, the landlord should get a release in exchange for the settlement check.
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 © 2018 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.