Landlord Penalized for Security Deposit Deductions

by | Mar 7, 2011 | Rental Property Management Tips

A landlord who asked an appeals court to let him off the hook after a jury awarded his former tenants nearly $3 million over security deposit disputes has lost his argument that this amount is excessive.

Originally, a jury awarded former tenants over $5.5 million dollars in punitive damages for wrongful deductions taken from their security deposits.  Because the tenant’s out-of-pocket losses were much less than that, a law required that the punitive damages award be reduced to around $1 million. 

The landlord’s mistake was mixing appropriate deductions with those for ordinary maintenance and upkeep of the properties. 

The  lease agreement required a deposit of 1.25 times the monthly rent. The lease provided that the deposit would be returned three weeks after termination, except for the deductions for damages. Each tenant was given a move-in checklist and could note any items of damage present at that time.  The landlord also sent out a cleaning checklist prior to move-out that included items like washing ceilings and walls, and meeting with a flooring contractor to determine any required treatment.

After a tenant moved out, the landlord would fix up the property as was needed — painting, floor repair and the like. The landlord also took photos of any damage.  Then, the landlord would send out an itemization of deductions.  

Many times deductions would include items like replacement light bulbs, mold or mildew removal, changing furnace filters, or pest control. 

Some accounting letters were 20 pages long with up to 80 items of damages.  In some cases, the items were the same as those listed for repair on the move-in checklist.

The landlord’s policy toward repairs included a requirement that if a broken part of an appliance was not available, the entire appliance would have to be replaced at the tenant’s expense.  He also charged the tenants for the time that the rental was vacant while it was being refurbished. 

 The landlord would sometimes sue the tenants for the outstanding balance, which was often thousands of dollars more than the security deposit. 

During the trial, another property manager testified that these deductions were “not within the standards of the industry” and said that these security deposit  policies were too aggressive and intimidating.

The landlord’s own records included detailed reports of any repairs conducted on each unit. However, the property management reports did not differentiate between damages caused by tenants, and ordinary upkeep.  In one case, the tenant was charged for soot damage to carpeting and walls that was caused by a fire somewhere else in the building.  The property management reports also showed that while the landlord claimed $500,000 of damages caused by tenants over the course of a few years, he only spent $215,000 on repairs.

The landlord made the argument that the $215,000 should be deducted from the penalties assessed against him because that figure represents legitimate tenant damage. But the court rejected that argument.

And then came the attorneys fees. 

The handful of tenants who at first complained contacted a number of other former tenants — as many as 200, and the case was certified as a class action.  Not only did that run up fees — a whopping $1.6 million at this point, but the sheer number of tenants affected showed a pattern of conduct that violated state law and caused the jury to find that the actions were intentional, and fraudulent.  As is the case in many other states, a pattern of misconduct justified the award of punitive damages, according to the court. 

In addition, the landlord must pay for an independent monitor to oversee his security deposit accounting practices in order to continue in the rental business.

The landlord has indicated he will consider another appeal to a higher court.

This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only).

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Disclaimer: The information provided in this post in not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.

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