REDBOOK Blues: Security Deposit Dilemmas

I trust that your new year is off to a wonderful start. This month begins the eleventh year of REDBOOK Blues.  These monthly articles seek to provide best practices for operational issues that arise for AATC members.  REDBOOK Blues does not provide legal advice.  If you need legal advice, contact one of AATC’s member attorneys (https://www.aatcnet.org/legal-services-program).

To kick off 2023, this month’s article focuses on security deposits. Resolving security deposit disputes drains valuable time from our on-site and corporate teams.  Following is an overview of the security deposit refund process and tips on how to navigate the 30-day time constraints effectively and efficiently.

First, begin by reviewing the TAA REDBOOK article “When an Owner is not Liable for Missing the 30-day Security Deposit Deadline.” (https://www.taaredbookonline.org/resident-life-and-management-issues/fair-housing/when-an-owner-is-not-liable-for-missing-the-30-day-security-deposit-deadline)

Second, review the TAA Lease and Move-In Inventory and Condition form. These documents help familiarize you with the obligations you have to your residents and that your residents have to you.

Next, review with each member of your on-site teams, your company’s move-out process:  notice, surrendering of keys, forwarding address, “walk-for-damages”, and how to document damages (photos, video, etc.).  If necessary, update and change these procedures. 

When a resident moves out, walk the unit for damages.  If sufficient on-site staff levels allow, assign security deposit walk-throughs to the assistant manager. Generally, it is the assistant manager that handles collections, late rent payments, and other resident financial issues. Helpful hint:  Be sure to document, document, document.  Takes lots of photos and videos.   Thorough documentation helps in three ways:  1) proof of damage if a resident disputes the charges; 2) helps estimate the cost of make-ready; and 3) ensures that all make-ready issues are addressed.

According to the REDBOOK, while the Texas property code requires 30 days, the Texas security deposit statute does not automatically and absolutely “impose penalties on an owner who misses the 30-day deadline for mailing a deposit refund or accounting to the resident.”

The REDBOOK points out numerous circumstances that may cause an owner to exceed the 30-day rule such as no forwarding address, a different move-out date than agreed upon, an incorrect forwarding address, etc.

State law says: 

“The landlord shall refund a security deposit to the tenant on or before the 30th day after the date the tenant surrenders the premises.”

The landlord is not obligated to return a tenant 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 addressfor purposes of refunding the security deposit."

"A landlord who in bad faithretains a security deposit in violation of this subchapter is liable for an amount equal to the sum of $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.

Those requirements raise lots of questions:  what do surrender, forwarding address, and bad faith mean? The TAA REDBOOK has guidance on each of these issues:

Surrender:  The TAA Lease defines surrender as either 1) the move-out date has occurred and no one is living in the unit; or 2) the resident has returned all keys, devices, etc.  The 30 days do not start until surrender.  

Forwarding address:  The TAA REDBOOK recommends a couple of options to deal with this problem:

• be sure to use the TAA form entitled "Resident's Notice of Intent to Move Out." This form contains an acknowledgment from the owner (which the resident can tear off and keep), confirming that the owner received the resident's forwarding address. If a resident did not give you a forwarding address and later lies to the contrary, you can ask: "Where is the owner's acknowledgment that the lease requires you to get?" That may help you but be advised that such an acknowledgment by the owner is not a requirement of the statute.
• If a resident has not given you a forwarding address within 30 days of move-out, mail the refund or accounting to the resident -at the address of the dwelling the resident leased from you. Put the words "ADDRESS SERVICE REQUESTED" on the front of the envelope about a quarter inch below your return address. Then, if the resident gave a forwarding address to the U.S. Postal Service, your letter will be automatically forwarded to the resident, and you will get a white card back from the mail carrier stating that your letter was forwarded to the resident and specifying the address to which it was forwarded. Then you can argue that if the resident didn't exercise enough foresight to give the mail carrier his forwarding address, it's unlikely that the resident gave you his forwarding address.

Bad faith: Following is information from the REDBOOK about the “bad faith” provision:

The statute is clear that not meeting the 30-day deadline is a presumption of bad faith. A presumption is a shifting of the burden of proof--not an automatic, irrebuttable conclusion. When the 30-day deadline is missed, the owner has the burden of proving that the delay was not in bad faith. Determining whether an owner acted in bad faith is a fact issue for the judge or jury. The test for bad faith is whether the owner or owner's agent had a dishonest or improper motive. In King v. Swanson, 291 S.W.2d 773 (Tex.Civ.App.- Eastland 1956, no writ), the court stated:

"Proof of bad judgment is not proof of bad faith. To prove bad faith some improper motive must be shown . . . something more than a mere mistake in judgment is necessary to establish bad faith. Bad faith is not imputable if honest intentions or freedom of unworthy motives characterizes the exercise of discretion."1 (emphasis added)

There are a number of occurrences that can be evidence of not acting in bad faith. Obviously, not all of these occurrences have to exist in the same case. Often, merely one or two important occurrences are enough but remember that the judge or jury has great latitude in deciding whether the existence of the facts in a particular case constitutes no bad faith. Noteworthy is that evidence that a landlord has reason to believe he was entitled to retain a security deposit to recover reasonable damages is sufficient to rebut the presumption of bad faith created by the Texas Property Code. The most frequent evidence and occurrences are listed below.

• Whether the owner relied on the move-out date stated in the resident's move-out notice and the owner didn't know that the resident actually moved out on an earlier date; 
• Whether the owner mailed a refund or accounting to the resident within the 30-day period at the address of the dwelling that the owner had been renting to the resident;
• Whether the owner voluntarily mailed the refund/accounting before the resident contacted the owner about being late;
• Whether the damages were so extensive or other circumstances made it difficult for the owner to get the work done within 30 days and to determine the amount of the appropriate deductions. Examples of "other circumstances" might include a shortage of labor due to natural calamity or serious utility problems; 
• Whether there were extenuating circumstances that might show that the owner's delay was not in bad faith--such as the death of the owner, death in the immediate family, serious illness of the owner or owner's managing agent, or a major fire or flood in the dwelling or apartment community during the 30-day period;
• Whether the owner's tardiness was for a short or long period of time, for example, two days versus 20 days;
• Whether there were letters or phone calls by the owner that indicate an intent or desire on the part of the owner to timely return the security deposit. These calls or letters might be considered evidence of good faith; 
• Whether the owner has a history of timely complying with the 30-day deadline with other residents;
• Whether the owner had a good system in place for complying with the statute but clerical error or oversight by the owner's employees was the reason for being late;
• Whether the owner promptly provided the refund or accounting after discovering the mistake; and
• Whether the deductions, if any, made in the accounting were reasonable.

Every resident is unique and so is every security deposit refund scenario.  The more knowledge you have about the process the better the operational outcome.

Happy New Year!

Nicole Zaitoon, Allied Property Management, is AATC’s 2022 Government Affairs Committee Chair and a member of AATC’s Board of Directors.