So you want to be a landlord? Part 4 -- The Security Deposit
Ok, Landlord. In the words of Inigo Montoya let me “sum up" our journey thus far:
- You’ve obtained your local jurisdiction’s rental license; 2. You’ve found a qualified, responsible, and trustworthy tenant for your rental property; 3. You’ve negotiated and drafted a lease agreement that protects you, your property, and one that delineates your obligations and your tenant’s responsibilities during the lease term.
So, now what? Please just don’t hand over the keys to your rental property without first ensuring that you are protected in the event that your tenant fails to pay rent or in the event that your tenant damages the leased premises and/or causes damage to any of your property within the leased premises. The best way to protect yourself in this regard is to require the tenant, pursuant to the terms of your lease agreement, to pay what’s called a “security deposit." A “security deposit" is defined by Section 8-203 of the Real Property Article of the Maryland Annotated Code as follows:
.."any payment of money, including the final month’s rent paid in advance, which is given to the landlord by the tenant in order to protect the landlord against non-payment of rent or damage to the leased premises, common areas, major appliances, and furnishings."
Keep in mind, Landlord, the State of Maryland has some pretty strict requirements regarding security deposits.
First, under Real Property Section 8-203 the maximum amount which a landlord may require as a security deposit for each dwelling unit he rents, regardless of the number of tenants within the leased premises, is the equivalent of two months’ rent. I say again, the amount of the security deposit cannot exceed the equivalent of two months’ rent! Don’t even try to charge more than that, Landlord, because if you do, you may find yourself liable to the tenant for damages in the amount of three times the excess amount plus reasonable attorney’s fees. (A tenant can bring an action to recover this amount at any time during the tenancy or within two years after the tenancy’s termination.)
Second, you must provide the tenant with a receipt for the security deposit as required by Section 8-203.1. Section 8-203.1 sets out the specific items which must be included in said receipt. Beware, Landlord, you will be liable to the tenant for $25 if you fail to provide the required receipt. Practical tip: It’s a good idea to include the receipt (and its statutorily required contents) within the actual Lease Agreement.
Note that the Lease Agreement or the receipt must contain language informing the tenant of his/her right to receive a written list of all existing damage to the leased premises from the landlord if the tenant so requests in writing within the first 15 days of the tenant’s occupancy. If a tenant requests this list of damages, then the landlordMUST provide it. If the landlord does not provide the list of damages as requested, the landlord is liable to the tenant for three times the amount of the security deposit. This liability of the landlord may be reduced by any damages or unpaid rent which he is entitled to under this section.Practical tip: Perform a walk through of the leased premises, in the tenant’s presence, at or just before the tenant begins occupancy, and note any issues with the leased premises on a checklist to be provided to the tenant.
Once you have received the security deposit, Landlord, you are then required to deposit it into a “federally insured financial institution," as defined in section 1-101 of the Financial Institutions article of the Maryland Annotated Code. The account must be devoted exclusively to security deposits and bear interest. The landlord must deposit the amount of each security deposit in that account within 30 days after receiving it.Practical Tip: It’s a good idea to open an account designated solely for security deposit(s). Don’t mix your personal funds with your tenant’s security deposit!This way you can also ensure that the security deposit bears interest, which ultimately, is required to be paid back to the tenant.
At the end of the tenancy, Maryland law is equally as clear regarding how security deposits are to be returned. Remember that pre-tenancy walkthrough and inspection? At the end of the lease, the tenant has the right to be present for a walkthrough and inspection as well. When the tenant notifies the landlord by certified mail that tenant intends to move out, and informs the landlord of the date of moving and tenant’s new address, tenant will have the right to be present when the landlord inspects the premises to determine if any damage was done beyond normal wear and tear. The tenant must mail a notice requesting to be present at the time of inspection at least 15 days prior to moving out. The landlord must then notify the tenant by certified mail of the time and date of inspection, which must be within 5 days before or 5 days after the tenant’s move.Practical Tip: The checklist used for the pre-tenancy walkthrough should also be used for the post-tenancy walkthrough to properly note any changes in the leased premises.
If any damages are found during the post-tenancy walkthrough, the security deposit, or any portion thereof, may be withheld for damage due to breach of lease or for damage by the tenant or the tenant’s family, agents, employees, guests or invitees in excess of ordinary wear and tear to the leased premises, common areas, major appliances, and furnishings owned by the landlord. The security deposit also may be withheld for unpaid rent.
This, however, is where it gets tricky, Landlord. Within 45 days after the end of tenancy, you MUST return to tenant the security deposit minus any amount which you may rightfully withhold. Simple interest of 3% per year must be paid on security deposits of $50 or more and must accrue at 6 month intervals from the day the security deposit was given. Interest is not compounded. If a landlord without good reason, fails to return any part of the security deposit within 45 days after the end of the tenancy, the landlord is liable to the tenant for up to three times the withheld amount of the security deposit plus reasonable attorney’s fees.
Be careful, Landlord. Section 8-203 could not be more clear. If you are withholding any or all of the security deposit, you must provide the tenant with a statement of the costs actually incurred by you to fix the damages. Put it this way: if, hypothetically, a tenant damages the leased premises’ hardwood floor, a landlord simply cannot obtain an estimate for repairs, deduct those charges from the security deposit, and then claim the security deposit for payment of those charges without first having actually spent money to perform the necessary repairs. That is, a landlord cannot assess damage charges to the tenant and keep the tenant’s security deposit without having actually incurred costs to make those repairs. This doesn’t mean, Landlord, that you can’t make the repairs yourself (However, you might want to be careful at how you are itemizing labor costs, especially if you are not a licensed contractor). This provision in Maryland law ensures that landlords properly use security deposits. Practical Tip: When a landlord withholds a security deposit, or a portion thereof, and sends the tenant an itemized list of costs actually incurred, the landlord should also include copies of receipts (both for labor and supplies) and/or paid invoices showing that repairs were actually made.
Again, improperly withholding a security deposit could subject a landlord to liability for three times the amount of the original security deposit.
Maryland law also sets forth how security deposits are to be returned in the event a tenant is evicted, ejected for breach of lease, or abandons the leased premises. These provisions turn on whether the tenant has given proper and timely notice of his or her new address and requests return of the security deposit. The obligations of the landord, however, essentially are the same as those stated herein. Security deposits are to bear interest, are to be returned timely, and any portion withheld should be accompanied by a statement of costs actually incurred.
In closing, I’ve seen a lot of landlord/tenant court cases arise from a landlord’s improper handling of a security deposit. Maryland courts tend to hold the landlord accountable and have awarded treble damages in the amount of three times the security deposit to a tenant. Thus, Landlord, a thorough understanding of your statutory obligations, and your adherence to those statutory requirements, will minimize the risk of your being sanctioned by a court of law for the mishandling of a tenant’s security deposit.