The Property Management Webinar Series Presents
Presented by
ABBY LEE,
Associate Counsel
October 17, 2012

Webinar Outline
I. Overview
II. Definitions i.
What is a ‘security deposit’?
ii. What is not a security deposit?
III. Holding the Security Deposit i.
Once the security deposit has been tendered by the tenant, who holds it?
ii. What are the rules when the property manager holds a security deposit?
IV. Refunding the Security Deposit i.
When is the landlord required to refund a security deposit?
ii. Does the tenant have to give advance notice of the surrender as a condition to receiving a refund?
iii. Who is responsible for the return of the security deposit if the property owner sells the property? The new owner or the former owner?
V. Retaining the Security Deposit i.
When can the landlord retain the security deposit?
ii.
What charges may a landlord deduct from the security deposit? iii. What must the landlord do if he or she retains any portion of the security deposit?
VI. Liability i.
What liability can a tenant face? ii.
What liability can a landlord face?
VII. Questions

Security Deposit Overview
1. On or before the execution of the TAR form 2001 Residential
Lease, the tenant or tenants will pay the landlord a security deposit.

Security Deposit Overview
1. On or before the execution of the TAR form 2001 Residential
Lease, the tenant or tenants will pay the landlord a security deposit .
2. The landlord (or property manager) will hold the security deposit in trust for the tenant or tenants.

Security Deposit Overview
1. On or before the execution of the TAR form 2001 Residential
Lease, the tenant or tenants will pay the landlord a security deposit.
2. The landlord (or property manager) will hold the security deposit in trust for the tenant or tenants.
3. Upon the tenant surrendering the property, the landlord has
30 days to:
• Completely refund the security deposit; or,
• Deduct damages and charges for which the tenant is legally liable under the lease and remit the balance to the tenant or tenants, along with a written description and itemized list of deductions.

Definitions

Definitions
A security deposit is any advance of money, other than a rental application deposit or an advance payment of rent, that is intended primarily to secure performance under a lease of a dwelling that has been entered into by a landlord and a tenant.

Definitions: Common Questions
& Answers

Definitions: Common Questions
& Answers
Answer: No. You should not call a deposit
“nonrefundable” because the Texas Property
Code requires that a landlord refund a security deposit less any lawful deductions. By calling a deposit “nonrefundable” you run the risk of violating the security deposit statutes.

Definitions

Definitions
An application deposit is a deposit given by an applicant and accepted by the landlord before a lease has been entered into.
While, a security deposit is a deposit to secure performance of a lease that has been entered into.
Note: A written agreement could convert the application deposit into the security deposit once the parties have signed the lease. See TAR form 2009 Agreement for
Application Deposit and Hold on Property.

Definitions
TAR form 2009, Agreement for Application Deposit and Hold on
Property

Definitions: Common Questions
& Answers

Definitions: Common Questions
& Answers

Webinar Outline
I. Overview
II. Definitions i.
What is a ‘security deposit’?
ii. What is not a security deposit?
III. Holding the Security Deposit i.
Once the security deposit has been tendered by the tenant, who holds it?
ii. What are the rules when the property manager holds a security deposit?
IV. Refunding the Security Deposit i.
When is the landlord required to refund a security deposit?
ii. Does the tenant have to give advance notice of the surrender as a condition to receiving a refund?
iii. Who is responsible for the return of the security deposit if the property owner sells the property? The new owner or the former owner?
V. Retaining the Security Deposit i.
When can the landlord retain the security deposit?
ii.
What charges may a landlord deduct from the security deposit? iii. What must the landlord do if he or she retains any portion of the security deposit?
VI. Liability i.
What liability can a tenant face? ii.
What liability can a landlord face?
VII. Questions

Holding the
Security Deposit

Holding the
Security Deposit
The landlord or the landlord’s agent may hold the security deposit.
If using TAR form 2201, Residential Leasing and Property Management
Agreement, paragraph 4.A(13-14) grants the broker the authority to maintain and account for security deposits:

Holding the
Security Deposit
The landlord or the landlord’s agent may hold the security deposit.
If using TAR form 2201, Residential Leasing and Property Management
Agreement, paragraph 4.A(13-14) grants the broker the authority to maintain and account for security deposits:
Paragraph 4.C of form 2201 also grants the broker this authority:

Holding the
Security Deposit

Holding the
Security Deposit
If a licensee holds a security deposit, TREC requires that the licensee must hold such money in a separate trust account. A broker may, but is not required to, maintain separate trust accounts for security deposits received for the management of rental property, and for other trust funds.
A trust account is defined as any trust, escrow, custodial, property management account, or other account in which a licensee holds money on behalf of another person. It is a bank account, usually interest-bearing, in which a licensee deposits money belonging to a client.
In addition, Article 8 of the Code of Ethics states that:
“REALTORS® shall keep in a special account in an appropriate financial institution, separated from their own funds, monies coming into their possession in trust for other persons, such as escrows, trust funds, clients' monies, and other like items.”

Holding the
Security Deposit
Is a license required?
A person must be licensed by TREC if he or she controls the acceptance or deposit of rent on behalf of an owner of a single family residence.
• This means he or she has the authority to:
• Use the rent to pay for services related to management of the property, or
• Deposit the rent into a trust account and sign checks or withdraw money from the account.
• Remember, this individual must also receive compensation for doing so.
Generally, bookkeepers and accountants do not need to be licensed if they collect rent but don’t sign checks.

Holding the
Security Deposit
Rules:
1. Trust accounts must always be in the broker’s name.
• A salesperson may not maintain a trust account. Any money received by a licensee who is not a broker, to be held in trust pursuant to a lease transaction, must be delivered to the salesperson's sponsoring broker to be deposited in accordance with the agreement of the principals in the transaction.
• A broker may designate a salesperson as an authorized signatory on any trust account (sign checks on behalf of the broker); however, the broker shall be solely responsible and accountable for all trust funds received by the broker and all deposits to or disbursements from the trust account.

Holding the
Security Deposit
Rules:
1.
Trust accounts must always be in the broker’s name.
2.
A trust account may be interest-bearing and the broker may retain the interest as long as the client agrees.
•
•
•
If using TAR form 2001 Residential Lease, paragraph 10.B gives the landlord or landlord’s representative the authority to place the security deposit in an interest-bearing account and retain the interest.
Also, if using TAR form 2201 Residential Leasing and Property
Management Agreement, paragraph 11.E provides that any trust account the broker maintains may be interest-bearing and the broker may retain any interest from the account.
Any money the broker retains must be removed from the trust account within 30 days of acquiring ownership.

Holding the
Security Deposit
Rules:
1.
Trust accounts must always be in the broker’s name.
2.
A trust account may be interest-bearing and the broker may retain the interest as long as the client agrees.
3.
The broker may deposit and maintain a reasonable amount of funds in the trust account to cover bank fees (including fees charged for insufficient funds).
• A broker may deposit and maintain additional funds in a trust account to cover bank service fees as long as detailed records are kept for any funds deposited under this exception. But remember…paying operating expenses or making withdrawals from a broker's trust account for any purpose other than proper disbursement of money held in trust is prima facie evidence of commingling money held in trust with the broker’s own funds.

Holding the
Security Deposit
Rules:
1.
Trust accounts must always be in the broker’s name.
2.
A trust account may be interest-bearing and the broker may retain the interest as long as the client agrees.
3.
The broker may deposit and maintain a reasonable amount of funds in the trust account to cover bank fees (including fees charged for insufficient funds).
4. Trust account records must be maintained for 4 years.
• A licensee maintaining a trust account shall retain for a period of four years a documentary record of each deposit or withdrawal from the account.

Holding the
Security Deposit
Rules:
1.
Trust accounts must always be in the broker’s name.
2.
A trust account may be interest-bearing and the broker may retain the interest as long as the client agrees.
3.
The broker may deposit and maintain a reasonable amount of funds in the trust account to cover bank fees (including fees charged for insufficient funds).
4.
Trust account records must be maintained for 4 years.
5. If any or all of the parties to a real estate transaction make demand for the money, the licensee must, within a reasonable time, properly account for or remit the money.

Holding the Security Deposit:
Common Questions & Answers
Question: I manage a property for a husband and wife who both signed a Residential Leasing and Property Management
Agreement (TAR 2201). The couple recently split. We’ve all agreed to terminate the agreement. However, the husband claims
I should turn over the money I hold in trust for them to him directly. The wife also has requested that I return this money to her. What do I do?

Holding the Security Deposit:
Common Questions & Answers
Answer: You may want to pay the money into the registry of a court and interplead the parties.
Same facts, but the couple were tenants: Since both tenants are parties to the lease, both tenants are entitled to any refund of the security deposit. Paragraph 10.C. of the lease requires that you make the check payable to both names on the lease. Both the lease and the
Property Code are silent on who the deposit should be sent to in this situation. You could also pay the money into the registry of a court and interplead the parties.

Holding the
Security Deposit
So what is the best practice?
Owner or brokers should have separate accounts for all funds, i.e. Owner Trust Account, Tenant Trust Account,
Operations account, with the accounts styled properly to clearly identify what kind of account they are:
• (Company Name), Trustee, (Type of Account).
If banks do not allow you to title your account as a “trust account”, make sure your own inner-office records identify the account as such.

Webinar Outline
I. Overview
II. Definitions i.
What is a ‘security deposit’?
ii. What is not a security deposit?
III. Holding the Security Deposit i.
Once the security deposit has been tendered by the tenant, who holds it?
ii. What are the rules when the property manager holds a security deposit?
IV. Refunding the Security Deposit i.
When is the landlord required to refund a security deposit?
ii. Does the tenant have to give advance notice of the surrender as a condition to receiving a refund?
iii. Who is responsible for the return of the security deposit if the property owner sells the property? The new owner or the former owner?
V. Retaining the Security Deposit i.
When can the landlord retain the security deposit?
ii.
What charges may a landlord deduct from the security deposit? iii. What must the landlord do if he or she retains any portion of the security deposit?
VI. Liability i.
What liability can a tenant face? ii.
What liability can a landlord face?
VII. Questions

Refunding the Security Deposit

Refunding the Security Deposit
A landlord must refund a tenant’s security deposit within 30 days after the tenant surrenders the property.
• The 30-day period begins when the tenant “surrenders” the property
• Surrender, according to TAR form 2001 Residential Lease, occurs when all occupants have vacated the Property, in Landlord’s reasonable judgment, and one of the following events occurs:
(1) the date Tenant specifies as the move-out or termination date in a written notice to Landlord has passed; or
(2) Tenant returns keys and access devices that Landlord provided to Tenant under this lease.
• However, the landlord is not obligated to return the security deposit or give the tenant a written description of damages and charges until the tenant gives the landlord a written statement of the tenant’s forwarding address.

Refunding the Security Deposit:
Common Questions & Answers
Question: Four tenants live in one rental property.
Tenant A leaves January 1 st . Tenant B & C surrender the property on January 15 th . Tenant D does not surrender the property until the last day of the lease—January
31 st . When does the 30-day clock begin to run?

Refunding the Security Deposit:
Common Questions & Answers
Answer: The security deposit is not due to any of the residents until 30 days after the last resident moves out. In this case, the security deposit refund, if any, would be due within 30 days after
Tenant D surrendered.

Refunding the Security Deposit:
Common Questions & Answers
Question: The tenant moves out of the property by the agreed upon lease termination date. However, the tenant fails to provide the landlord with a written statement of the tenant’s forwarding address. Does the landlord still have to refund the tenant’s security deposit within 30 days after the move-out date?

Refunding the Security Deposit:
Common Questions & Answers
Answer: Generally, no. The statute specifically states that the landlord is not obligated to return a security deposit until the tenant gives the landlord a written statement of the tenant’s forwarding address. If the tenant never gives the forwarding address to the landlord, the 30-day time period remains suspended.
If, however, the tenant gives notice 15 days after surrendering the property, and the landlord does not refund a portion of the security deposit until 30 days
after that, it could be a fact question for a judge or jury whether or not the landlord acted in bad faith.

Refunding the Security Deposit:
Common Questions & Answers
Question: Does the tenant have to provide an address that is his or her actual residence?
Answer: No. There is no requirement that the forwarding address be the actual residence of the tenant.
Question: What if the landlord is in bankruptcy at the time the security deposit is due?
Answer: The tenant’s right takes priority over the claim of any creditor, including a trustee in bankruptcy

Refunding the Security Deposit:
Common Questions & Answers
Question: What happens if the tenant never provides a written statement of the tenant’s forwarding address?

Refunding the Security Deposit:
Common Questions & Answers
Answer: If the tenant never provides a written forwarding address, then it could be argued that technically, the 30-day deadline for which the landlord has to refund and/or provide a written list of itemized deductions never begins. However, only one court of appeals opinion holds that the 30-day period does not begin until the written statement of the tenant’s forwarding address is provided.
Therefore, although not required by the Texas Property Code, the best practice in this situation is to continue holding the security deposit in trust (potentially, up to four years as that is the most lengthy statute of limitations for a dispute involving a security deposit) and make reasonable effort to contact the tenant(s) and document this effort. If those efforts are unsuccessful, you may pay the security deposit into the registry of the court or the security deposit could escheat to the state.

Refunding the Security Deposit
Does the tenant have to give advance notice of the surrender as a condition to receiving a refund?

Refunding the Security Deposit
Yes, but only if the lease states so.
• If the lease states that the tenant must give advance notice, the requirement must be underlined or printed in conspicuous bold
print.
• TAR form 2001, Residential Lease requires the tenant to give the landlord notice of surrender as a condition and complies with this rule.

Refunding the Security Deposit
A landlord is presumed to have refunded a security deposit or made an accounting of security deposit deductions if, on or before the date required, the refund is placed in the U.S. mail and postmarked on or before the required date.
Mailing the refund on the 30 th day complies with the statute’s requirements.

Refunding the Security Deposit
Why does the tenant need to provide a forwarding address?
• Because the landlord is NOT obligated to return the security deposit or provide a written description of damages or charges until the tenant gives the landlord a written statement of the tenant’s forwarding address.
• The tenant, however, does not forfeit the right to a refund or the right to receive a description of damages or charges merely by failing to provide a forwarding address.

Refunding the Security Deposit
Who is responsible for the return of the security deposit if the property owner sells the property? The new owner or the former owner?

Refunding the Security Deposit
The former owner and the new owner are jointly liable according to the Texas
Property Code.
The new owner is liable from the date title is acquired, regardless of whether notice is given to the tenant.
The former owner is liable 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. The statement must specify the exact dollar amount of the deposit.
Best Practice: Property managers should have the new owner sign TAR form
2210 Notice to Tenant of Change in Management and Accountability for
Security Deposit. This form provides notice to the tenant of any change in ownership or management and who is now accountable for return of the security deposit.

Refunding the Security Deposit:
Common Questions & Answers

Refunding the Security Deposit:
Common Questions & Answers
Answer: The same section of the Texas Property Code which can exempt a former owner from liability does not apply in this situation. Therefore, regardless if the foreclosed owner is released from liability, the tenant can sue the foreclosed owner for:
• three times the amount of the deposit,
• $100 penalty, and
• attorney’s fees.
Or… the mortgagee (the lender or creditor) can refund the security deposit , then the mortgagee can sue the foreclosed owner to recover triple damages, a $100 civil penalty, attorney’s fees and court costs.

Refunding the Security Deposit:
Common Questions & Answers
TAR’s form 2220, General Information for Tenant of Property
Facing Foreclosure should also be handed to the tenant.

Refunding the Security Deposit:
Common Questions & Answers
Property managers should utilize TAR form 2201
Residential Leasing and Property Management
Agreement because it has the Foreclosure provision.
• The property owner authorizes the broker to return any security deposit the broker is holding to the tenant.

Refunding the Security Deposit
Record Keeping: The landlord is required to keep accurate records of all security deposits.
• TAR form 2201 Residential Leasing and Property
Management Agreement requires the broker to maintain accurate records and retain them for 4 years.
Remember: As a licensee, if you hold money belonging to another
(including security deposits), you are required to hold it in a trust account. TREC requires licensees to retain a documentary record of each deposit or withdrawal from the trust account for a period of 4 years.

Refunding the Security Deposit:
Common Questions & Answers
Question: If a tenant dies, what happens to the security deposit?

Refunding the Security Deposit:
Common Questions & Answers
Answer: The Texas Property Code states that a landlord may make a written request for the tenant to provide the contact information of a person to contact in the event the tenant dies along with a signed statement authorizing the landlord to refund the tenant’s security deposit to the designated person.
TAR form 2001 Residential Lease requests this information from the tenant.

Webinar Outline
I. Overview
II. Definitions i.
What is a ‘security deposit’?
ii. What is not a security deposit?
III. Holding the Security Deposit i.
Once the security deposit has been tendered by the tenant, who holds it?
ii. What are the rules when the property manager holds a security deposit?
IV. Refunding the Security Deposit i.
When is the landlord required to refund a security deposit?
ii. Does the tenant have to give advance notice of the surrender as a condition to receiving a refund?
iii. Who is responsible for the return of the security deposit if the property owner sells the property? The new owner or the former owner?
V. Retaining the Security Deposit i.
When can the landlord retain the security deposit?
ii.
What charges may a landlord deduct from the security deposit? iii. What must the landlord do if he or she retains any portion of the security deposit?
VI. Liability i.
What liability can a tenant face? ii.
What liability can a landlord face?
VII. Questions

Retaining the Security Deposit

Retaining the Security Deposit
Generally, the landlord can retain the security deposit if:
1. The tenant fails to move in (subject to certain requirements), or
2. If damage is caused to the property (excluding normal wear and tear).

Retaining the Security Deposit
If the tenant fails to move in, the landlord must return the security deposit if all of the following occur:
• a lease has been entered into,
• the tenant fails to move in by the commencement date,
• the tenant secures a replacement tenant who is satisfactory to the landlord, and
• the replacement tenant moves in on or before the commencement date.
What if the landlord, not the tenant, secures a replacement tenant?
The landlord may then retain and deduct from the security deposit:
1.
a sum agreed to in the lease as a lease cancellation fee; or
2.
actual expenses incurred by the landlord in securing the replacement, including a reasonable amount for landlord’s time in securing the replacement tenant.

Retaining the Security Deposit
If a lease has not been entered into, the landlord
cannot retain the security deposit if the tenant fails to move in.
Remember, there is no security deposit if a lease has not been signed by the parties.
Best Practice: Use TAR form 2009 Agreement for
Application Deposit and Hold on Property. If the tenant fails to move in and a lease has not been entered into, the landlord will be able to retain the
application deposit (not the security deposit).

Retaining the Security Deposit
TAR form 2009, Agreement for Application Deposit and
Hold on Property

Retaining the Security Deposit:
Common Questions & Answers
Question: I'm a listing agent for an owner who's leasing his single-family residence. A potential tenant submitted an application and application fee. Once the applicant was screened and approved, he and the landlord executed the lease, and the tenant provided a security deposit along with the first month's rent. A few days before the move-in date, the tenant notified me that he would no longer be moving in because he found a better deal. He asked that I send the security deposit and the first month's rent to his new forwarding address. The landlord is upset and wants to retain the entire security deposit along with the first month's rent. Is the landlord entitled to retain the security deposit and the first month's rent?

Retaining the Security Deposit:
Common Questions & Answers
Answer: If a satisfactory replacement tenant is not secured and moved in to the dwelling no later than the lease's commencement date, the landlord may be entitled to retain the security deposit and the first month's rent because the tenant is in default. Keep in mind the landlord’s duty to mitigate and that a landlord cannot collect double rent.
The landlord will not be able to retain the security deposit or the first month’s rent if the tenant finds a replacement tenant satisfactory to the landlord and the replacement tenant moves in by the lease’s commencement date.
On the other hand, if the landlord finds a replacement tenant with the same conditions, the landlord may deduct from the security deposit and the first month’s rent either a sum agreed to in the lease as a cancellation fee or actual expenses incurred by the landlord in securing the replacement tenant.

Retaining the Security Deposit
What charges may a landlord deduct from the security deposit?

Retaining the Security Deposit
A landlord may deduct charges or damages that the tenant is legally liable for under the lease or as a result of its breach.
Under no circumstances, may a landlord retain any portion of a security deposit to cover “normal wear and tear.”
TAR form 2001 Residential Lease defines “normal wear and tear” as deterioration that occurs without negligence, carelessness, accident, or abuse.

Retaining the Security Deposit
TAR form 2001 Residential Lease

Retaining the Security Deposit:
Common Questions & Answers

Retaining the Security Deposit:
Common Questions & Answers

Common Questions & Answers

Common Questions & Answers
Answer: No. Although, Section 92.104 of the
Texas Property Code permits the landlord to deduct from the security deposit all damages and charges resulting from breach of the lease, there is no automatic forfeiture.

Retaining the Security Deposit

Retaining the Security Deposit
The landlord is required to return the remaining balance, if any, along with a written description and itemized list of all deductions.
• See TAR form 2216 Itemization of Security Deposit
Note: The landlord is NOT required to provide a description and itemized list of deductions if the tenant owes rent at the time he surrenders the premises and the amount of rent owed is not in dispute.

Retaining the Security Deposit
What if the security deposit does not cover all the damages and charges?
• The landlord may recover the balance along with attorney’s fees and court costs.
• Remember: There is a duty to mitigate—both the
Property Code and the TAR form 2001 Residential
Lease require this.
• TAR form 2001 Residential Lease requires the landlord to mitigate any damage or loss caused by the tenant’s breach by attempting to relet the property.

Retaining the Security Deposit:
Common Questions & Answers

Retaining the Security Deposit:
Common Questions & Answers
Answer: While the property owner may be entitled to the entire security deposit, it is not automatic. If the tenant left a forwarding address, the owner or property manager is still required to provide a written description and itemized list of deductions within 30 days after surrender.

Webinar Outline
I. Overview
II. Definitions i.
What is a ‘security deposit’?
ii. What is not a security deposit?
III. Holding the Security Deposit i.
Once the security deposit has been tendered by the tenant, who holds it?
ii. What are the rules when the property manager holds a security deposit?
IV. Refunding the Security Deposit i.
When is the landlord required to refund a security deposit?
ii. Does the tenant have to give advance notice of the surrender as a condition to receiving a refund?
iii. Who is responsible for the return of the security deposit if the property owner sells the property? The new owner or the former owner?
V. Retaining the Security Deposit i.
When can the landlord retain the security deposit?
ii.
What charges may a landlord deduct from the security deposit? iii. What must the landlord do if he or she retains any portion of the security deposit?
VI. Liability i.
What liability can a tenant face? ii.
What liability can a landlord face?
VII. Questions

Liability

Liability
If a tenant withholds any part of the last month’s rent on grounds that the security deposit will cover the balance, the tenant will be presumed to have acted in bad faith and can face liability to the landlord for:
1. Three times the amount of rent wrongfully withheld, and
2. Reasonable attorney’s fees in a suit to recover rent

Liability

Liability
1. If a landlord in bad faith retains a security deposit…
The tenant can sue for:
 $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.
• What is bad faith?
• To prove bad faith, some improper motive must be shown…something more than a mere mistake in judgment.
Under the Property Code, a landlord who fails to return a security deposit or 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.

Liability
2. If a landlord in bad faith fails to provide a written description and itemized list of damages/charges…
The landlord:
 forfeits the right to withhold any portion of the security deposit or to bring suit against the tenant for damages to the property; and
 is liable for the tenant’s reasonable attorney’s fees in a suit to recover the deposit.

Liability: Common Questions &
Answers

Liability: Common Questions &
Answers
Answer: Since you are no longer the property owner’s agent, you should forward the security deposit to the owner and remind him that he is now liable to the tenant. You should also send written notice to the tenant advising him that you are no longer responsible for return of the security deposit, and the landlord is now responsible for it.

Conclusion
•
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