Navigating Security Deposits

By Kim Schmitt, Managing Broker

As a Landlord or Property Manager one of the most important processes we do is collecting and reconciling security deposits.  The purpose of this blog post is to provide direction to help you successfully navigate the security deposit process and to avoid possible pitfalls.

The Purpose and Collection of a Security Deposit

As a landlord or manager, we are entrusting a property to the care of a tenant, and many things can and do go wrong. Obtaining a security deposit is one of the most important things we can do before renting out a property.  A summary of reasons to always collect security deposits include financial protection against tenant damage to the property, early termination of a lease, non-payment of rent and unpaid utilities upon move-out.  It is advisable to confirm with your state, city and county of any laws that you must follow. Before a landlord can collect a security deposit from a tenant in the state of Wisconsin, he or she must provide a few disclosures to the tenant as well as a written receipt upon receiving the tenant’s security deposit.  It is strongly recommended not to allow a security deposit to be used as the last month’s rent.  That’s the same thing as returning the deposit early in which case the funds will no longer be available to use should the unit have damage upon move-out inspection. 

Determining the Amount of Security Deposit to Charge

The characteristics of the property itself often determines how much a landlord or manager should collect as a security deposit. For instance, a single-family property may have added amenities like a hot tub or expensive landscaping which would warrant a higher deposit than, say, a standard studio apartment in a multifamily building.  Most often, the security deposit is equal to the first month’s rent. 

Storing a Tenant’s Security Deposit

In the state of Wisconsin, there are no specific requirements about how a landlord must store a tenant’s security deposit. The security deposit does not have to be placed in a separate account or earn interest.  With that said, please confirm with your state, county and city as their laws on the storing of security deposits may differ. 

What Can Be Withheld from A Security Deposit?

The general rule is that a landlord or manager can only withhold security deposit monies for actual damages, material or financial. Meaning, you can deduct money if they owe you past due rent and fees or caused damages beyond normal wear-and-tear. Normal wear and tear are the expected decline in the condition of a property due to normal everyday use. It is deterioration that occurs while living in a property. It is not caused by abuse or neglect. In the state of Wisconsin, a landlord can keep all or a portion of a tenant’s security deposit for the following reasons:

• Damage in Excess of Normal Wear and Tear

• Unpaid Rent 

• Unpaid Utilities

• Money Owed for Violating Nonstandard Rental Provisions (fees, etc.)

In Wisconsin, a landlord can include additional reasons he or she can make deductions from a tenant’s security deposit. These additional reasons must be included as a separate written statement called Nonstandard Rental Provisions. The landlord must show and explain these provisions to the tenant before entering into a lease agreement with the tenant. The tenant must sign this provision. Note It is illegal to deduct for routine carpet cleaning from the security deposit even if the tenant signed a lease that states that they must pay for carpet cleaning. The exception is if they damaged the carpet beyond “normal wear and tear.

Defining Damage That Can Be Deducted from Security Deposits 

Damage is not naturally occurring. It is harm that affects the value, usefulness or normal function of property. This damage can be committed on purpose or through neglect.  

Examples of damage might include:

• A smashed bathroom mirror

• A broken toilet seat

• A hole in the middle of a door

• Damaged or missing door handles/locks

• Carpet soaked with pet urine, rips from pets/furniture, multiple stains and cigarette burns

Is a Walk-Through Inspection with the Tenant Required?

No. A walk-through inspection with the tenant is not required in the state of Wisconsin when a tenant moves out. A tenant can request that a landlord do a move-out inspection, but it is not required by law.

When Must a Landlord Return the Deposit?

Each state may have a different timeframe to follow. In Wisconsin, the landlord has 21 days after the lease ends to send the full security deposit and/or an itemized list of deductions.  

Who Should the Deposit be Returned to?

The landlord should return it to whoever the tenants told the landlord in writing to make the check out to, or whoever the landlord chooses to return it to if there were no written instructions. The regulations no longer tell the landlord they must put everyone’s names on the check, so tenants who rent together should think carefully about who they want the check going to and getting cashed by. It is easier to have it be just one person, but there is more accountability if everyone has to sign it.

Can a Landlord be Sued in Small Claims Court Over Security Deposit Deductions?

Absolutely yes, in the State of Wisconsin if the landlord does not return the security deposit and/or list of deductions within the required 21 days, or if the landlord took out money for things the tenant disagrees with, the tenant can end up suing the landlord for double the amount wrongfully withheld, plus court costs and reasonable attorney’s fees.  If the landlord returns the money before the tenant files in court, the tenant can no longer sue since now they are not owed any money. Double damages only apply if the case goes to court.

Summary

In my experience, I have seen cases where Landlords have charged items against security deposits that would have never made it past a judge had the tenant taken them to court.  It is extremely important that as Property Managers and Landlords we fully understand security deposit state laws, requirements and the definitions of normal wear and tear to avoid legal action.  Visit Brio Properties regularly to learn how to successfully manage your properties.