By: Brian Canfield
January 28, 2022
When my roommates and I moved out of our rental townhouse, we received an itemized list from our landlord detailing various deductions taken from our security deposit. To our dismay, our landlord deducted most of our security deposit. Luckily, my father was a practicing tenant attorney and succeeded in reducing the deductions from $2,000 to $300, as many of the deductions were unwarranted and some of the clauses of the lease were unenforceable or illegal. Crisis averted.
However, most tenants do not have such easy access to tenant attorneys, and thus many dishonest landlords take advantage of tenants and return too little of their security deposit. Landlords are able to wrongly withhold deposits for a couple of reasons. In general, tenants do not have in-depth knowledge of applicable landlord/tenant law. Additionally, in many cases it does not make sense for tenants to dispute deductions from security deposits, given that the time investment plus court and attorney’s fees often outweigh the amount of money landlords wrongly withhold. To prevent continued abuse, local legislatures should consider three options: banning the security deposit, creating a government agency to hold security deposits, and requiring treble damages for wrongly withheld security deposits.
The first, and most extreme option is simply to ban security deposits. Instead, the landlord would need to sue the tenant to recover the cost of repairs if the rental unit was damaged. Landlords generally have better access to lawyers than the average renter, as well as a greater familiarity with landlord/tenant law developed through their experience as landlords.1A Philadelphia study found that landlords have legal representation 80% of the time, whereas tenants have legal representation just 7% of the time. Accordingly, landlords are in a better position than tenants to use the court system to collect compensation for damage. While this burden shifting addresses the access to justice problems that many renters face, in addition to reducing how much tenants must pay at the start of the lease, it creates a new problem. Tenants may be difficult to locate since they will move on to a new residence that the landlord may not know about. Although it may seem like a positive change from the tenants’ perspective, given that tenants may be able to completely avoid paying security deposits, it may cause landlords to raise rent prices on all tenants.2On the other hand, a majority of states already cap the amount of a security deposit to, at most, two months’ rent. Properties can be damaged by far more than one or two months’ rent, and in those scenarios, the same address problem exists, so perhaps the rent increase would not be that substantial. While the benefits of banning the security deposit likely outweigh the downside, options to eliminate this downside should also be considered.
The second option, creating a new government agency or tasking an existing government agency to hold security deposits in escrow, still shifts the burden of bringing suit to the landlord but prevents tenants from escaping notice. Under this plan, the agency would hold the funds until the lease is over and would return the security deposit to the tenant after the tenant provides their new address. The agency would then provide the landlord with that address, allowing the landlord to serve notice to their former tenant if the landlord would like to pursue legal action for damage to their property.3A possible variation on this option is to require the landlord to present the agency with repair costs before requesting money from the tenant. The tenant then has the option to accept this, in which case the agency sends the landlord a portion of the funds needed for the repairs and sends the remainder to the tenant. If the tenant does not accept, then the agency gives the money to the tenant and the landlord can choose to bring suit. This solution maintains the benefit of placing the burden on the landlord, while erasing the drawback of landlords not being able to find tenants. However, this option still requires the tenant to pay the security deposit, which could be an obstacle for lower income tenants, and adds some bureaucratic complexity to the security deposit system. Funding for administrative costs could at least partially come from interest on the deposits held in escrow, similar to how money is raised for charitable purposes from interest on the money lawyers hold in IOLTA accounts.
The final option, which does not involve shifting the burden of pursuing damages to the landlord, would require courts to award treble damages to tenants who have had money wrongly withheld from their security deposit. Currently, some states, such as Connecticut and Delaware, only allow for enhanced damages if the landlord fails to provide the security deposit minus the deductions with an itemized list of said deductions. Other states, like Maryland, already allow for treble damages on any amount withheld without a reasonable basis. Similarly, states and cities, like California and Washington D.C., allow for treble damages only in instances where the deposit is withheld in bad faith.
While the Maryland, D.C., and California statutes are improvements upon the statutes in Connecticut and Delaware, a few tweaks should be made to them. For example, the treble damages should be required as opposed to discretionary. A study of small claims cases in California illustrates that courts are very hesitant to penalize landlords, with courts imposing penalties in only 7% of cases in which landlords were found to have improperly deducted from the security deposit. This 7% chance of penalties does little to disincentivize over-deducting from the security deposit.
Relatedly, liability should be determined on a strict liability basis, as opposed to a reasonableness standard or a requirement of bad faith. A strict liability standard, which would require a landlord to pay treble damages any time they are found to have improperly deducted from a security deposit, would reduce legal costs for those who retain lawyers and reduce the difficulty for those representing themselves. There is a reduction in legal costs and difficulty because in states like Maryland, tenants would not have to prove the unreasonableness of the landlord’s actions, and in bad faith states, the tenant would not have to prove the landlord’s state of mind, which can be difficult to ascertain. For example, in a D.C. case, the court declined to award treble damages citing a lack of evidence on the state of mind of the landlord, despite also finding the landlord’s behavior to be intimidating and occasionally threatening. The court found the improper deductions to be the result of “bad judgement and poor management” instead of bad faith, and imposed no penalties. Without strict liability, a landlord’s bad judgment and poor management would end up penalizing the tenant except for the rare situations in which the tenant sues the landlord. In order to disincentivize landlords from displaying such poor judgment at a cost to the tenant, landlords should face treble damages whenever they improperly deduct money from the tenant’s security deposit. While the onus to bring the lawsuit is still on the tenants under this option, a larger and more certain award will increase tenants’ incentive to bring suit. This option also fits easily into the current security deposit status quo, potentially making it more attractive to more change-resistant legislators.
Since the status quo in most states tends to leave tenants receiving less of their security deposit than they are entitled to, any one of these three reform options would be advantageous to the 44.2 million American households that are renters. Court and legal fees, as well as the time expenditure, often make bringing an action for recovery not worthwhile. On top of those costs, tenants often do not have the same understanding of landlord/tenant law that landlords do. These three options either place the burden of bringing a lawsuit to recover portions of the deposit on the landlord or disincentivize improper deductions from the security deposit. Both result in the average tenant keeping a larger portion of the deposit that they are entitled to.
Brian Canfield, J.D. Class of 2022, New York University School of Law
Suggested Citation: Brian Canfield, Security Deposits: Potential Fixes to an Unfair System, N.Y.U. J. Legis. & Pub. Pol’y Quorum (2022).
- 1A Philadelphia study found that landlords have legal representation 80% of the time, whereas tenants have legal representation just 7% of the time.
- 2On the other hand, a majority of states already cap the amount of a security deposit to, at most, two months’ rent. Properties can be damaged by far more than one or two months’ rent, and in those scenarios, the same address problem exists, so perhaps the rent increase would not be that substantial.
- 3A possible variation on this option is to require the landlord to present the agency with repair costs before requesting money from the tenant. The tenant then has the option to accept this, in which case the agency sends the landlord a portion of the funds needed for the repairs and sends the remainder to the tenant. If the tenant does not accept, then the agency gives the money to the tenant and the landlord can choose to bring suit.