Landlord should collect only one deposit -- the security deposit!

A landlord cannot collect a security deposit equal to more than one and one-half month’s rent. For example, if the monthly rent is $1,000.00, then the maximum security deposit a landlord may legally collect is $1,500.00.  For more information about "maximum amount of deposit," see this blog post.

For now, just understand that any amount you collect that is refundable, without regard to what you call it (i.e., pet deposit, cleaning deposit, key deposit, etc.) is "security" under the ACT and is subject to the one and one-half month's rent limitation.  If, however, you collect a pet fee, cleaning fee, rekeying fee, or any other fee or charge that the tenant will never get back no matter what the tenant does or does not do, then that money is not "security" under the ACT, is not subject to the one and one-half month's rent limitation, and does not have to be refunded to the tenant -- ever!  Consequently, in the same example above, the landlord may collect a $1,500 security deposit, a $250 nonrefundable cleaning fee, a $250 nonrefundable redecoration fee, and a $25 nonrefundable application fee, but that same landlord COULD NOT collect a $1,500 security deposit and a $1 key deposit, because then the amount of deposits the landlord would be holding exceeds one and one-half month’s rent.

Here is a similar example, but demonstrates why the landlord should only collect one "deposit" -- the security deposit -- and no other "deposits."  Same example as above but the landlord collects a $1,000 security deposit and a $500 refundable cleaning deposit. So far, the landlord is okay (i.e., the total "security" collected is less than or equal to one and one-half month's rent). The tenant leaves at the end of the lease term and owes $2,000 in past due rent. There is no property damage and the property is left cleaner than when the tenant moved in. The landlord will want to apply all $1,500 to the past due rent, but he can’t. Under the Act, "‘security’ means money or property given to assure payment or performance under a rental agreement." (See A.R.S. § 33-1310(14)). The tenant left the property clean and, therefore, the tenant is legally entitled to return of ALL of the $500 cleaning deposit.  Why?  Because the $500 "cleaning deposit" is "security" under the ACT because it is refundable.  The rental agreement may or may not explain the conditions upon which the tenant will receive a full refund of the $500 cleaning deposit, but any judge who hears this case will (rightfully) conclude that the purpose of a "cleaning deposit" is to assure the landlord that the property will be clean when the tenant moves out; if not, then the landlord is entitled to deduct cleaning expenses from the $500 cleaning deposit.  In our example, the tenants vacated owing rent, but left the rental unit spotless.  It was the landlord -- not the tenant -- who decided to collect $500 and to label it a "cleaning deposit."  The "cleaning deposit" can only be used for cleaning expenses, not unpaid rent, property damage or anything else.  If the landlord holds onto that $500 deposit, then the landlord has "wrongfully withheld" part of the tenant’s refundable deposits and the tenant can sue the landlord for the $500 deposit, plus statutory damages equal to twice the amount wrongfully withheld (i.e., $1,000), plus attorney’s fees and court costs. A really bad result for the landlord. 

Fortunately, the solution is simple. The landlord should collect only one deposit – a security deposit. I always recommend that my clients collect only a security deposit (not to exceed one and one-half month’s rent) because the ACT permits the landlord to apply the security deposit to any amounts owed by the tenant: rent, property damage, cleaning, whatever. 

Comments

[Frances]

I had a tenant record the move out inspection without my knowledge. Is that legal? A person NOT on lease was trying to pinpoint words. Tenant left the oven very dirty, and was not like that at move in. I wrote that down. Non lease person wanted to know why I wrote down 'needs cleaning'. They expect not to be charged apparently? I did say I would not 'charge' them under pressure. Very pushy people.. do I have a right if the oven doesn't come clean to charge an additional small amount? I will have to spend additional time cleaning or have someone else do it.

Response by Carlton C. Casler. Let's look at the "bigger Picture." The landlord may charge for cleaning and any condition that exceeds "normal wear and tear." How clean or something was at the beginning of tenancy compared to the end of tenancy is sometimes difficult to establish. The same goes for "wear and tear" existing at the start of tenancy as compared the additional "wear and tear" at the end of tenancy and whether the "additional" wear and tear was "normal" wear and tear. These are factual issues that can only be established with witnesses and photographs. Witnesses are okay, but photographs are much better because the landlord will testify that the carpet, appliances, etc., were spotless when the tenant moved in and the tenant will testify otherwise. There is no way to predict what a judge will do and that, in my opinion, is unacceptable. Photographic evidence, on the other hand, makes it much easier for a judge to make that decision. Consequently, all landlords should do the best job they can documenting the condition of the property before and after tenancy. The next question is: How do you convince the judge to award the landlord compensation for work (i.e., cleaning, repairs, etc.) done by the landlord? There is only one way: it must be in the written rental agreement. When I draft a rental agreement, I include this provision:

"In the event Tenant vacates the Premises without performing cleaning, maintenance and/or repairs that are Tenant’s responsibility, then Landlord shall have the option to: (a) hire a licensed or unlicensed person(s) or company to perform the task and Landlord may then bill Tenant for the cost thereof and/or deduct the cost from the Deposit or (b) Landlord, if willing and able to do the task, may do all or part of the work and may charge Tenant $35.00 per hour or, if more, an hourly rate equal to that charged by other persons or companies for the same type of work."

If specific charges are expressly stated in the rental agreement, most judges (but not all) will award those charges.

[keith cox]

If a management company charges a pet fee (not pet deposit), can that fee be kept by the management company, or does it need to go to the owner?

Response by Carlton C. Casler: Yes, the management company could keep the fee. Whether or not the management company may keep the pet fee (or any other "fee") is determined by the provisions of the Property Management Agreement ("PMA") between the owner and the property manager. The fee could go to the owner or to the management company, depending on what is stated in the PMA.

[Ryan]

Are there any rules in Arizona regarding the proper handling of security deposit? Is the landlord required to keep deposits in a separate "trust" account? Can the landlord earn interest on held deposits?

Response by Carlton C. Casler: The controlling statute for security deposits for residential rental property (there is no statute for commercial rental property) is A.R.S. Section 33-1321 (go here: http://www.azleg.gov/FormatDocument.asp?inDoc=/ars/33/01321.htm&Title=33&DocType=ARS). A private landlord is not required to keep deposits in a trust account, but a property management company, if it holds the deposits, must deposit the tenant’s deposits into a trust account (see A.R.S. Section 32-2174; go here: http://www.azleg.gov/FormatDocument.asp?inDoc=/ars/32/02174.htm&Title=32&DocType=ARS). A private landlord may earn and keep interest on the tenant’s deposits. A property management company may earn interest on the deposits and may keep the interest if the lease includes this disclosure and the property management agreement with the property owner permits the property manager to keep the interest.

[Rebecca Compton]

I am a small commercial landlord. I recently had a Realtor show the property and then bring a prospective tenant who give me a $2000.00 Security deposit to hold a building, stating he wished to sign a lease for a 6 year lease term. At the time, I was renovating the building and putting in new carpet and tile. The tenant asked that I put tile in where I was going to carpet. I did this as he asked. All the papers, including the lease agreement were sent to the tenant for his signature.

Also, I had another prospective tenant whom I was meeting the next day to take a deposit. I called this prospective tenant and told them I had already accepted a deposit on the building.

The realtor contacted me and set up an appointment to meet and bring me the lease agreement. After a week went by, I received a letter from the prospective tenant's son stating that, "We are going to take some time to clarify our requirements with some of our associates, and then we will get back at you so we can agree on what will work for you and us. We are probably going to take a few more weeks before being ready to proceed." He also asked for the security deposit to be returned.

Am I obligated to return the deposit? I am already out more money than the security deposit will cover with the tile because now I will need to have the tile torn out and carpet put down in the offices.

Sincerely, Rebecca Compton

RESPONSE by Carlton C. Casler:
The problem is that you took a deposit without any written agreement regarding the purpose of the deposit. The safe thing to do is to just return the money. If you keep the deposit and the prospective tenant sues to recover the deposit, you may win or you may lose; it will depend on the judge. For future reference, next time you take a deposit, use a form that clearly sets for the terms of the agreement.

[Tim]

If a landlord charged and collected more than the legally permitted 1 1/2 month's rent in security deposit (in my case it was 3 1/2 times rent), would that make the entire AAR Residential Lease Agreement contract invalid and unenforceable? In other words, since it was unlawful to collect that amount, was the lease ever actually a valid and binding lease? Could I provide 30 day notice to leave, even if there are 6 months left on the 24 month term because the lease was invalid from day one, and therefore, I actually have a month-to-month tenancy? Follow-up question assuming the lease was invalid and unenforceable since day one: If the landlord refunded the overage amount at the 12 month mark bringing the deposit into compliance with the 1 1/2 limit, would that somehow make it a valid and binding contract?

Response by Carlton C. Casler: No, that will not invalidate the lease and you are not entitled to terminate the lease on that basis online, however, you are entitled to demand return of the refundable deposits collected by the landlord in excess of that allowed by law. If the landlord refuses, then serve a 10-Day Notice of Material Noncompliance. If the landlord refuses to provide a refund within the 10 (calendar) days, then you may terminate the lease and vacate. You would also have a statutory claim against the landlord for wrongfully withholding your refundable deposit, which entitles you to triple damages (i.e., the amount wrongfully withheld, plus two times that amount). See A.R.S. Section 33-1321.

[Brian]

Can my landlord charge me a non refundable security deposit?

Response by Carlton C. Casler: No.

[Jacqueline Colyott]

I have applied for a rental home that rents for $895.00 per month. They advertised the deposits as such $500.00 earnest, $400.00 security, $250.00 per pet, $600.00 cleaning fee. They are now telling me they want 1350.00 security deposit, $500.00 pet (2 pets), $300.00 cleaning, and $300.00 redecorating fee. Everything but $300.00 is refundable. If you add all of this up plus firsts months rent of 895.00 this totals $3345.00. Is this legal???

Response by Carlton C. Casler: No. Whatever the "label," the landlord can only collect refundable deposits equal to one and one-half months rent. Rent is $895, so the maximum deposit the landlord may collect is $1,342.50. Your prospective landlord is trying to collect $2,100.00, which is clearly over the limit. The landlord may be ignorant of the law or intentionally violating the law. In either case, you may want to think about whether you want to do business with this landlord.

[Genevieve Cruz]

If I have paid 1st months rent 1295.00, the same amount in a security deposit plus prorated 2nd months rent of 658.20 and non refundable pet deposit of 300.00 & refundable pet deposit of 200.00. Will I be obligated to pay last months rent if proper notice is given?

Response by Carlton C. Casler. No. The maximum security deposit (which includes all other types of REFUNDABLE deposits) is an amount equal to one and one-half months rent, which in your case is $1,942.50. The nonrefundable pet fee (not deposit) is not included in the foregoing calculation. If the landlord tries to ask for the last month's rent in advance that would exceed the lawful amount and s/he could not force you to pay it.

[Matt Smithlin]

My ex-tenants are asking for receipts for the repair of the itemes damaged by them. Do I have to provide them with the receipts?
Thanks, Matt

Response by Carlton C. Casler: No. You are only required to provide an itemized list of deductions you are taking from the tenant's refundable deposits.

[Greg]

The landlord is collecting a security deposit and non-refundable cleaning fee. Our agreement requires that we leave the unit spotless. If we don't, according to the agreement, the landlord will charge my security deposit at the rate of $50 per hour for cleaning. Is that legal? What is the purpose of the non-refundable cleaning fee?

Response by Carlton C. Casler. The rental agreement may lawfully require you to leave the rental unit clean after you vacate. The “purpose” of the non-refundable cleaning fee is required to be stated in the rental agreement. (See ARS Sec. 33-1321(B)). As for whether $50 per hour for cleaning is lawful, the Act allows the landlord and tenant to include in the rental agreement ANY term or condition, as long as it does not violate the Act. (See ARS Sec. 33-1314(A)). The $50/hour provision does not violate the Act. As a practical matter, however, if the case goes before a judge, the judge may reduce or eliminate the $50/hour provision.

[Ellen]

I am being told by a property management company that they can charge more than the 1 1/2 times rent as security (they are charging last months rent on top of the security) if the prospective tenant has something negative in their credit report (they also said they can charge more if the prospective tenant has a felony or misdemeanor, which does not apply to me). Is this factual and where can I find information on this?

Response by Carlton C. Casler. That is false. The statute is ARS Sec. 33-1321(a). The statute does not have an exception for bad credit or any other exception.

[Christian]

I am interested in what constitutes "security deposit" and if it can be changed based on wording? I am moving into a new rental because current rental is in foreclosure. The new landlord is charging the following: 894.69 First month rent, 238.62 prorated rent, 875 refundable security deposit, 250.00 non-refundable cleaning fee and 894.69 last month rent. My understanding is the 875, the 250 and the last months rent all would be the "security deposit" even though these exact words are not used. Is this correct and then amount would then exceed the 1 1/2 months rent allowed to be collected as security? thank you.

Response by Carlton C. Casler. The term "security" is defined in the Act: " 'Security' means money or property given to assure payment or performance under a rental agreement. 'Security' does not include a reasonable charge for redecorating or cleaning." (See ARS Sec. 33-1310(14)). The Act also says: "A landlord shall not demand or receive security, however denominated, including, but not limited to, prepaid rent in an amount or value in excess of one and one-half month's rent." (See ARS Sec. 33-1321(A)). Your landlord has collected more security that permitted under the act. He has collect the first month's rent (that's okay), a security deposit of $875 (that's okay), and the last month's rent $894.69 (that IS NOT okay). The last month's rent is prepaid rent exceeds the limit. So does the $238.62 prorated rent. You may demand (in writing, of course) return of your deposits in excess of the legal amount. If the landlord refuses, you may sue in small claims court or in civil court for the amount unlawfully collected, PLUS twice that amount. (See ARS Sec. 33-1321(E)).

[Jonathan Wood]

Lorena's comment is an interesting one. When my tenants move in, I ALWAYS give them a list they must fill out with any flaws with the apartment and sign it. The must return it to me within two weeks or the assumption is made that there are no flaws with the apartment. When they move out, they will be responsible for any flaws not on that list.

If I were a tenant, I would expect the same list because it benefits both landlord and tenant. If the landlord did not provide such a list, I would write my own and get the landlord to sign it.

[Lorena]

I am a renter and we just moved out of our rental on the first. we paid a security deposit of $1500 and received a $400 discount off our first months rent for cleaning the house to move-in so we didnt do a move-in inspection because of that there were stains on the carpet and some stains on the walls as well. We paid $590 to get house profesionally cleaned inside and out including the cleaning of the carpet and landscaping and trash removal... now our landlord is saying becasue of some stains that wer enot able to come out he needs to replace the whole carpet upstairs and downstairs... Can he charge us for total replacement of carpet if pictures show stains in certain ares of the home?

Response by Carlton C. Casler: A tenant must return the rental property to the landlord at the end of the rental period in the same condition (or better) than the commencement of the tenancy, except for "normal wear and tear." The controversy that often arises centers around what constitutes "normal wear and tear." If you can demonstate your useage was only normal wear and tear, then you should get all of your deposit back. Also, the age and quality of the carpet is important. If the carpet was already at the end of its "economic life" (i.e., it was supposed to last 10 years and you moved in 9 or 10 years after it was originally installed), then the landlord is NOT entitled to charge you for the entire cost of recarpeting his rental unit.