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    What Is a Security Deposit, Inventory Checklist and a Notice of Damages?

    Can I collect a security deposit, and how much can it be?

    The State of Michigan allows you to collect a security deposit when a tenant moves in and hold it until the tenant moves out. In order for you to demand a security deposit, you must notify the tenant in writing of:

    • your name and address where you receive communications,
    • the name and address of your financial institution or surety bond where the funds have been placed , and
    • the tenant’s obligation to provide, in writing, a forwarding mailing address to the landlord within 4 days after termination of occupancy. This notice must be made no later than 14 days from the date a tenant assumes possession of your rental unit. Furthermore, this notice must include the following statement in 12 point minimum sized boldface type and type which is at least 4 points larger than the body of the notice or lease agreement: “You must notify your landlord in writing within 4 days after you move of a forwarding address where you can be reached and where you will receive mail; otherwise your landlord shall be relieved of sending you an itemized list of damages and the penalties adherent to that failure.” If you do not provide this notice, the tenant is relieved of having to provide you with a forwarding address. All RPOA leases and rental agreements contain this language. Be very careful of other lease agreements found online. Many do not meet the font size requirement.

     
    The required deposit cannot exceed one and one-half (1 1/2) times the rental amount. (For example: Rent = $800 = Max. Security Deposit of $1,200.) Many property owners set the deposit amount at a fixed rate or an amount equal to the monthly rent. Setting a high rate will limit prospective tenants to those who can afford to lay out that much cash in advance. If your unit is in an area that attracts tenants who consistently damage units to a greater extent than properties in other areas, a higher deposit might be advisable.

    Who should I get the deposit from?

    Regardless of how many tenants are on a lease, you should only accept payment of the security deposit from one person on the lease. This will enable you to return the security deposit—if needed—to one person after all the tenants have moved out. Checks from a joint account is acceptable but remember that any returned deposit should be on a check made out to all persons shown on the joint account. Read more about this in the “To whom do I send any remaining security deposit?” section.

    Where should I keep the security deposit?

    First and foremost thing to remember is: the security deposit is the property of your tenant’s—not yours. The deposit must be placed in a regulated financial institution. You may put the deposits in the same account as your other funds and use the money for any purpose you desire. However, if you do this, you must deposit with the Secretary of State a cash bond or surety bond written by a surety company licensed to do business in this state. The amount of the bond must be equal to the total deposits collected up to $50,000 and 25% of any amount exceeding $50,000. If you often find yourself in a tight cash position, it would be advisable to avoid using the funds and, instead, place the deposits in an interest bearing checking account separate from all other funds. This will ensure that the funds are there when the tenant moves or you sell the property.  You do not have to pay the tenant the interest earned.

    What can I use the deposit for?

    The purpose of the security deposit is to compensate the landlord for: (1) damages caused by the tenant or their guests, (2) unpaid rent, and (3) past due utility bills. That’s all—nothing else. This doesn’t mean that you can’t sue the tenant for other kinds of things. Remember though that you can’t charge for damages claimed on a previous itemized list of damages.

    Damage under the law is defined as “…actual damages to the rental unit or any ancillary facility that are the direct result of conduct not reasonably expected in the normal course of habitation…” . Items which are in disrepair or soiled from normal daily use would not be considered damages but rather normal wear and tear. Examples of normal wear and tear could include dirty ovens, soiled carpets, paint yellowing, or toilet bowl stains.

    Unpaid rent is defined as “…all rent in arrearage under the rental agreement and/or rent due for premature termination of the rental agreement/lease…” . You cannot charge a tenant rent due under a lease after you have rented the unit to another tenant.

    Utility bills are defined as “…bills not paid by the tenant.” Any utility bills that were supposed to be paid by the tenant may be considered damages.

    Remember that the deposit is the lawful property of the tenant until you have established a right to it or a portion thereof. Establishing this right is done with a combination of a “commencement inventory checklist” and a “termination inventory checklist”. You’ll find more on checklists below. Click here for commencement and termination inventory checklist.

    What is and how do I use a “Commencement Inventory Checklist”?

    The commencement Inventory checklist is used to detail the condition of the rental unit at the time of move in. The landlord should furnish the tenant with two (2) blank copies of the checklist at the time they move in or before. The checklist should contain all the items in the rental unit owned by the landlord.

    The tenant must return a copy of the checklist to the landlord within seven (7) days after receiving possession of the premises.

    The checklist must contain the following notice in 12 point boldface type at the top of the first page: “You should complete this checklist, noting the condition of the rental property, and return it to the landlord within 7 days after obtaining possession of the rental unit. You are also entitled to request and receive a copy of the last termination inventory checklist which shows what claims were chargeable to the last prior tenants.” What is and how do I use a “Termination Inventory Checklist”?

    The termination inventory checklist is used to itemize the damages that you find after the tenant vacates the property. You can use this checklist as the foundation for preparing the “itemized list of damages”. You will use the list of damages to establish claim to the security deposit or a portion thereof. The itemized list of damages is explained below. Checklist forms are available at the RPOA office or online

    What is and how do I use an “Itemized List of Damages”?

    The itemized list of damages (also called the Notice of Damages) is a list of physical damages to the rental unit and any other “damages” that you may permissibly use the security deposit for, i. e. rent in arrears, rent due for premature termination of a lease, or unpaid utilities. This list must include an estimated or actual cost of repair for each item where appropriate. When describing the damage, you should be very specific. For example: repair of torn carpet at exterior door in living room.

    You must mail the Itemized List of Damages to the tenant at their last known address or the forwarding address they’ve give you within thirty (30) days after the tenant has returned possession of the rental unit to you. (If you don’t have a forwarding address, you can use the last known address—probably the address of your rental unit which they occupied.)

    Along with the List, you should also send a check or money order for the difference between the security deposit and the total amount of damages indicated on the List. If a balance is due you after the security deposit is applied, you should highlight this fact and ask that the tenant forward the balance due you within 30 days. Make sure you indicate who their check should be made out to and where it should be sent.

    The list of damages must also include the following statement in 12 point boldface type which shall be at least 4 points larger than the body of the notice: “You must respond to this notice by mail within 7 days after receipt of same, otherwise you will forfeit the amount claimed for damages.” This simply means that the tenant must contact you by mail within seven days after receiving the list of damages. If they don’t, they forfeit their right to disagree with you about keeping all or a portion of their security deposit. Click here for the Michigan Notice of Damages.

    What happens if I don’t send a Notice of Damages?

    If you don’t send the notice of damages within the required 30 days after the tenant moves out, you are agreeing that no damages are being claimed and that you’ll return the entire security deposit to the tenant immediately. There are two variations to this however: If the tenant does not inform you in writing of their forwarding address within 4 days after moving out, you do not have to send the Notice of Damages within 30 days. (However, you still have to send the Notice and return any amount of the security deposit due the tenant—just not as quickly.)  Or, if the amount being kept out of the security deposit is only for rent past due, you do not have to send a Notice of Damages.  The RPOA recommends always sending a Notice of Damages–even if the two variations apply.  If the Notice is returned to you via the mail, keep the envelope unopened in your tenant’s file.  This will protect you in the future it the tenant claims you did not send them the Notice of Damages.

    What if the tenant disagrees with me about the damages claimed?

    If the former tenant disagrees with you, they must do so in writing within seven (7) days after receiving the Notice of Damages. If they disagree with you, to keep the security deposit you must file a small claims complaint with the local District Court to get a money judgment. (In the case of an eviction, you may be returning to the District Court with a supplemental complaint to collect money for damages after the tenant has moved-—instead of going to small claims court.) You must file this complaint within forty-five (45) days of the date the tenant moved out. In lieu of going to court, you can negotiate a mutually agreeable written settlement between you and the former tenant. Get this agreement in writing!

    Are there circumstances when you don’t have to have a money judgment to retain the deposit?

    Yes. Under the following circumstances, you do not have to have a money judgment to retain the security deposit:

    • The tenant failed to respond to the Notice of Damages.
    • The entire amount claimed for damages is for unpaid rent.
    • You and the tenant have agreed in writing to the disposition of the security deposit before the above mentioned 45 days is up.

     
    Final thought: Under Michigan law, the tenant can always sue the landlord for their security deposit–even if they have not complied with the law themselves.

    To whom do I send any remaining security deposit?

    You must return any security deposit for which you cannot legally lay claim to. (See uses of security deposit in previous section.) The check or money order should be made out to the same person shown on the original check given to you for the deposit. Checks received for deposit from joint accounts should be made out to both persons shown on the check. Never return an apportioned amount of a deposit to a tenant who quits the unit while others are still living there. The best rule to follow is: the deposit stays with the lease. You don’t want to leave yourself, literally, short-changed by returning a portion to someone before the end of the lease.

    What do I do with the security deposits when I sell a rental property?

    After your termination of your interest in the applicable rental unit by sale, assignment, death, or appointment of receiver you are still liable for the security deposits until the occurrence of one of the following:

    • Transfer of the deposit to the new landlord or successor in interest and a written notification has been sent to the tenants by ordinary mail of the transfer, including the new landlord’s or successor’s name and address.
    • The security deposit has been returned to the tenant.

     
    Source: Michigan Compiled Law 554.601-616. Click here for the actual codified law.

     

    Disclosure: This Knowledge Base article is accurate as of the last update. Laws and policies are subject to change. If you have any questions, please call the office. Click here for contact information.

    Clay Powell