5 Cases When a Landlord Should Keep a Security Deposit

No landlord wants to be forced to withhold funds from a tenant’s security deposit. Typically, landlords only ever withhold these funds in situations where the tenant broke the terms of the lease agreement or didn’t take care to maintain the property’s condition. 

Unfortunately, even if you make the effort to thoroughly screen your tenants and outline the terms of the lease, there may still be a chance that you’ll have to keep a tenant’s security deposit. 

This is a common occurrence. However, varying local and state laws could influence how you handle the situation.

The first thing to do is to learn about the most common situations where it’s both legal and reasonable to withhold all or some of a tenant’s security deposit funds. Let’s dive in.  

1. Breaking a Lease Early

Whether you sign a lease agreement for a month or a year, it’s expected that the tenant will stay for the duration of the lease term. 

However, life happens. A tenant could take a job out of state. Or, a break-up could cause your tenants to move out sooner than they anticipated. 

Regardless of what happens, once a tenant has broken the lease agreement early, not only is your cash flow hindered, but you are also looking at a period of at least a month to find a new tenant. You must deep-clean, make repairs, screen applicants, market your property, and more.

That’s why it’s imperative to have an early lease termination clause in your lease agreement. Without one, you may not be able to withhold any of your tenant’s security deposit funds to cover your losses.

This clause should contain the following information:

• Mandatory Notice Period: The tenant must give the landlord at least “X” days’ notice of early termination of the lease. You may add different notice periods for month-to-month leases.

• The Tenant’s Financial Responsibilities: Your early lease termination clause should clearly state what the tenant will be responsible for paying and when. For example, a tenant may be responsible for paying rent for covering some or all of the remainder of rent they’ll owe during the lease term, if they don’t give sufficient notice.

• Security Deposit: If a tenant breaks the lease early, you may hold on to all or some of the tenant’s security deposit, so long as it’s stipulated in your lease agreement. 

Keep in mind that your lease agreement and subsequent lease termination clause must always abide by local and federal housing laws. Be sure to read up on those before finalizing your lease agreement template.

2. Extensive Property Damage

The wording here matters. It would be unreasonable to not refund a tenant’s security deposit funds for normal wear and tear. 

However, if the tenant has caused extensive damage to your property, then you are well within your rights to use the funds to cover the cost of repairs. 

Keep in mind that there’s a clear difference between normal wear and tear and damage. Normal wear and tear occurs as a tenant makes regular use of the apartment. It’ll naturally occur during the time they live on your property. 

Examples of normal wear and tear:

• Smalls Stains in Carpet or on Walls
• A Few Surface Scratches on Hardwood Floors
• Small Holes in the Wall (i.e. from hanging decor)
• Tarnished Fixtures (i.e. kitchen, bathroom, door handles)

As you can see, each of these examples would require little effort to repair or touch up. They aren’t usually a cause for concern. 

However, extensive damage is in a completely different category. That’ll require a lot of time and effort to repair or clean. 

Examples of extensive damage:

• Missing Keys
• Severe Water Damage
• Large Holes in the Wall
• Broken or Shattered Windows and Mirrors 
• Cracks In or Completely Broken Countertops
• Large and Hard-to-Remove Stains Throughout the Unit
• Missing or Broken Appliances (stove, smoke detectors)
• Misc. Broken Hinges, Missing Outlet Covers, Holes in Doors

This type of damage will typically cost money for labor and parts to repair. If your tenant has caused this kind of damage, you’re legally allowed to withhold all or some of their security deposit funds to cover those costs.

3. Missed Rent Payments

Landlords are entitled to collect rent payments from their tenants. If a tenant completely defaults on their rent payment, they may still legally be required to pay it. 

It’s important to note that rent default occurs when a tenant is unable to pay rent in a timely manner. However, if a tenant is willfully withholding rent, there are different laws regarding this situation. 

Most landlords require a security deposit from tenants when signing the lease agreement. This deposit is typically equal to 1 or 2 month’s rent payments. It’ll protect the landlord if the tenant misses their rent payment. 

Landlords may need to go through the process of eviction and finding a new tenant. As a result, requiring a security deposit is a proactive approach.

Security deposit laws are handled on a state level. But generally, landlords may use security deposit funds to cover late rent payments if a tenant moves out or is evicted and still owes rent. 

However, you’ll still need to follow laws that dictate when and how you’ll return the security deposit.

It’s possible for a tenant to owe more back rent than their security deposit can cover. This is common in eviction cases. If you find yourself in this situation, you may need to take your tenant to small claims court to get them to pay their debt.

4. Excessive Cleaning is Required

Most tenants will do you the courtesy of cleaning out their apartment before they move out. Many will do that even without the lease specifically requiring them to do so. 

However, there are tenants who leave your property a mess. That guarantees that you’ll need to spend hours cleaning it or hire a service. In these cases, landlords can use the security deposit to cover these costs. 

It’s a good idea to cover your move-out policy in the lease agreement. Detail any consequences such as partial or full security deposit withholding. 

However, it’s important to know the difference between excessive and normal cleaning. Having to remove a can left in the cabinet is normal. Replacing carpets due to non-housebroken pets is excessive.

5. Unpaid Utility Bills

Unpaid utility bills are a common occurrence when a tenant breaks the lease agreement. If the tenant has not paid their utility bills and they are past due, you may be able to use security deposit funds to cover these costs.

Unfortunately, landlords may still be responsible for unpaid utility payments. That’s the case even if the utilities are in the name of their tenants. 

If that’s the case, you may discuss your options with the utility company. Ask about relief options. To avoid this, you may be able to ask the tenant to come up with a payment plan. With a payment plan, they’d pay any unpaid utility bills or rent at a later date.