Picture of a house over coins. Security deposit processing picture

How do we determine what is charged to the tenant, and what is charged to the owner for repairs and damage?

What happens if we charge the tenant too much? Why is it important to get it right the first time? 

Top Properties has spent years working through every imaginable situation when it comes to security deposits. We’d like to share our knowledge with you now.

First of all, what exactly is a security deposit? A security deposit is a predetermined sum of money given by a Tenant to a Landlord to cover any unpaid rent or damages to the property caused by neglect or abuse by the tenant or their guests. 

It is essential to realize that in the state of Colorado, anything called a “deposit” is refundable. There is no such thing as a “non-refundable deposit” in our state. On the other hand, fees can be non-refundable. That is why we began charging a cleaning fee in addition to a security deposit about a year ago. We know some of the most disputed security deposit charges are cleaning costs, so we proactively charge these feesupfront for full disclosure.

Calculating Security Deposits

So, what should be charged to a tenant’s security deposit?

  • Unpaid rent or utility charges
  • Excessive property damages from abuse or neglect
  • Excessive cleaning charges, for cleaning above normal wear and tear 
  • Any other breach of contract that causes financial damage

Let’s start with unpaid rent

This is cut and dry: if the tenant owes back rent, we can legally charge it to their security deposit. One caveat: if we place a new tenant during the time covered by the tenant’s rental amount, we cannot legally charge two tenants for the same days. The days covered by the new tenant must be refunded back to the exiting tenant.

The next item talks about excessive property damage due to abuse or neglect

This point is subjective because of the word “excessive” and the intent prescribed to the terms “abuse” and “neglect.” This means there is some grey area here, but we have outlined detailed examples of what is excessive and what is normal wear and tear, which we will cover in-depth in future articles and blogs.

The following item uses our favorite subjective term again: Excessive cleaning charges for cleanings above normal wear and tear

The courts expect owners to cover some cleaning between tenants. They understand the tenants can cover some as well. We have split this fee according to industry averages based on square footage. We charge a flat fee to the tenants based on the square footage of your home and a separate flat fee for carpets. The owner covers the rest. Typically, our owners end up paying 25% of the cleaning fees, which the courts have determined is fair and reasonable.

The final item is a breach of contract that causes undue financial damage to the owner

A simple example of this is the abandonment of the property. In this case, the tenant has caused the owner vacancy costs, leasing fees, or both. An owner may keep the security deposit to cover this breach of contract.

So, once the item passes one of the tests above to determine if it CAN be charged to the security deposit, the next question is: how much of the total repair can be charged?

If the tenant caused the damage, the entire repair bill could be charged back to them, right?

No.

We can legally charge the useful life that was stolen from the owner. Which means, we need to know the useful life of every item we plan to bill back to the tenant, and need to be able to prove when it was last replaced. Useful life calculations will be covered in great detail in a future article. 

The most common items we see contested in court are paint and carpet. One coat of paint every year is the owner’s responsibility, and paint has a useful life of 3-5 years. Carpets have a useful life of 5 years, which means if your tenant took possession in 2015, moves out in 2020, and your paint and carpet were new at move-in, you cannot charge anything back to the tenant for either of those items, even if the damage to the paint and carpet are obviously caused by tenant abuse. We will cover more soon and give plenty of examples, but we want to start this conversation now since we are working with so many of you on security deposits.

When do we need to return the security deposit balance to the tenant? By law and our lease agreement, we have 60 days upon lease termination or abandonment. Our goal is 45 days, as most of the work is done in the first week, and our vendors are on a net-30 billing cycle, which means they send invoices within 30 days. Once we have all the invoices in hand, we begin the tedious job of detailing and documenting each charge. 

Lock showing restriction of funds processing

What happens if we charge the tenant too much? Why is it important to get it right the first time? 

If the tenant disputes the charge, we have a few days to return the disputed charge or go to court. The courts have been leaning heavily in the tenant’s favor in the past year or so, and what starts as a $50 charge, soon becomes a $5,000 charge. 

If we get it wrong, we owe TRIPLE the charge amount back to the tenant, plus any court fees, and even worse – if they obtain legal counsel, we would need to obtain counsel ourselves, and would owe for both sides’ legal fees. A $50 charge becomes $150 (triple), a couple hundred in court fees, a thousand each for their counsel and ours, and possibly lost work time, etc. Not to mention, the court will analyze EVERY charge at that time and may find more charges in the tenant’s favor. This happens all the time right now, and the biggest caution from our lawyers is to err on the side of returning too much versus too little. If in doubt, pay it out. It is better to give back a couple hundred dollars than to end up in court and owe multiple thousands.

The courts see your property as a business and the homeowner as a business owner

There are costs the courts associate with running a business, including cleanings, paint between tenants, new carpet, new appliances, etc. The way the courts see it, homeowners have many benefits, including equity pay down, appreciation, and tax benefits. There are costs associated with these benefits and risks assumed by the homeowners. 

This information may be surprising to many of our new landlords. The good news is: we are here to help. Our process ensures only removing charges that are fully defensible in court. We plan to win so that you won’t have unnecessary legal fees on top of normal landlord costs. We will handle the entire process for you. 

We are here for you. We have your back. We are Top Properties, your Partner in Real Estate.