Property Management Education

Top Reasons Landlords Get Sued On Tenant Security Deposit Returns

After working with thousands of real estate investors over the past several decades, we have seen a pattern in some of the most common mistakes that landlords make when they are returning a security deposit to a tenant vacating a property. When a tenant moves out of a property, the landlord must complete a security deposit disposition, where they return the security deposit to the tenant or how much money should be withheld from the tenants’ security deposit for charges due. Being aware of the six biggest mistakes that landlords make when completing a security deposit return will set you up for success when dealing with tenants vacating and ensure you are following the law.

It is important to remember that the security deposit is the legal property of the tenant. The purpose of a security deposit disposition is to legally inform the vacated tenant of any amounts of the security deposit that are now being legally withheld by the landlord. These withholdings may only be done for damages to the property caused by the tenant, amounts past due per the lease, and withholdings must comply with the terms of the lease agreement as well as Colorado state law.

1. Taking too Long

Colorado law states that landlords have a maximum of 30 days after the tenant has vacated the property to refund the security deposit. The exception to this 30 day period is that if the lease specifically states the landlord has up to 60 days to complete the deposit return, but the lease must include this language for the 60 days return time to apply.  If this time frame is exceeded in either case, the landlord forfeits any right to retain the tenant’s security deposit for any reason AND may be liable to pay three times the amount of the security deposit to the tenant. Therefore, Denver real estate investors must ensure that they are timely in completing deposit returns.

2. Confusing Wear and Tear for Damage

Colorado law distinguishes between wear and tear and damage and it is important to note the distinction between the two. While Landlords may make deductions to the security deposit for tenant caused damages, they may not make any deductions to the security deposit for items of wear and tear or property improvements. Wear and tear refers to the natural deterioration of things as time progresses, whereas damage is caused by the negligence of the tenants. If a landlord incorrectly charges for what could be legally defined as wear and tear, they may be responsible for paying the tenant three-times the amount of the incorrect charge or deduction. 

Click the link below to watch our video in which we further explain the differences between wear and tear vs damage: 

3. Treating a Deposit as “Non-Refundable”

A deposit is, by legal definition, refundable. Legally, a landlord cannot have a non-refundable deposit; rather any funds defined as a “deposit” must be refundable to the tenant. Therefore, it is important to recognize the difference between a non-refundable fee and a deposit, as any type of fee also labeled with the word “deposit”, must be refundable. 

4. Forgetting to Check the Final Utility Bill

All final utility bills should be taken into consideration when determining how much of the tenant’s security deposit may be withhold. For example, in Colorado, most utilities are billed in arrears,  so the final utility bill will not be billed until after the tenant has moved out. This means that the landlord may need to contact the utility company for a final billing statement, and then ensure that any unpaid charges are properly charged to the tenant’s security deposit.

5. Over Charging for The Landlords Time

The process of bringing a property back to rent ready condition after the previous tenants have vacated may include items like repainting the walls, mowing the lawn, or making other small repairs. While landlords may charge the price of the materials used to repair tenant caused damage, they may not charge for their personal time involved in the process of making these repairs.

6. Not Considering the Life Expectancy of an Item

Every item in a property has a different life expectancy, and Colorado real estate investors and landlord must take this into consideration when charging a tenant for replacement of such an item. For example, most carpet have a life expectancy of five to ten years. If a carpet is five years old when a tenant moves into the property, and they live at the property for another five years, the life expectancy of the carpet has been exceeded by the time the tenant moves out. Consequently, regardless of the condition of the carpet at the time of move-out, landlords may not charge for damage done to the carpet. If replacement of an item is required in which the life expectancy has not been reached, then a life expectancy formula should be used to determine the amount of deduction that should be made to the tenants security deposit. 

The improper withholding of tenant security deposits has become such a legally significant issue in Colorado that the Colorado state Attorney General's office has recently announced investigations and legal actions against property management companies and landlords who are improperly making charges against tenant security deposits. Click the link below to view a recent Investigation which resulted in a $1,000,000 settlement against the property manager.

At Grace Property Management we are committed to integrity, fairness, and full legal compliance in any retention of tenant security deposits. We believe that when property management is performed with integrity, both tenants and landlords’ benefit. 

Property Management is not just our business - it is a relationship between us, our owner-clients, and our tenant-residents. If these are important to you, we may be a good fit to provide you, your property, and your tenant-resident with our award-winning property management service. Feel free to reach out to us for assistance.

Serving real estate investors & residents since 1978


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