How secure are your security
deposits?
If you collect security deposits from incoming residents (and
we highly recommend that you do), extra care should be given to ensure the funds
are handled properly. The Connecticut Banking Commission, the agency appointed
to oversee security deposit handling, has defined the following simple rules to
help keep landlords out of hot water:
-
Landlords may collect no
more than the equivalent of two month’s rent (one month for residents 62
years or older);
-
Landlords must hold the
security deposits collected in a separate interest-bearing account and serve
as the escrow agent for that account;
-
Once a year, the landlord
must pay to the tenant any interest earned on the deposit;
-
After the resident vacates
the premises and provides a forwarding address (in writing),
the landlord must return the security deposit or account for how it was used
within the appropriate timeframe.
Sounds
easy enough, right? As a firm, we commonly see problems arise with items #3 & 4
- the handling of security deposit interest and the handling of the security
deposit at the end of the tenancy. Allow us to delve a little deeper into each
item to clear up some of the fog.
Interest earned on security
deposits
Interest earned on each
security deposit must be paid once a year directly to the tenant. Failure to do
so can result in a Banking Commission fine or in some instances, prosecution and
incarceration. Payment can be made in the form of either a rent credit or
direct compensation.
IMPORTANT:
Interest is earned only during months in which the rent was paid on time (within
the statutory grace period). If payment is late, no interest is accrued.
EQUALLY
IMPORTANT: Landlords who charge late fees CANNOT withhold interest on the
security deposit, even when the rent is late. If a late fee is collected for
late rent, full interest is due.
Returning
a security deposit
Rules regarding the
return of a resident’s security deposit are equally simple in design, but much
more complicated in practice. To avoid pitfalls, the landlord must:
-
Return the security deposit
within 30 days of the tenant vacating (given the tenant provided a
forwarding address in writing);
-
Account, in writing within
the same time period, for the use of the security deposit, along with the
return of any unused portion (if it exists); OR
-
Do a. and/or b. (as applicable) within 15 days of receipt of a forwarding
address (in writing) if the former tenant delivers such address more than 15
days after they vacate the premises.
Typically, issues with the return of a security deposit
arises when the premises are damaged (or left in disarray), or if the tenant
vacates with unpaid charges on their account. How the security deposit can be
applied in either or both of these two instances relies largely upon what is
written in the lease.
While state statutes dictate that landlords may charge for
any damages resulting from the tenant’s failure to comply with their tenant
obligations, the language is a bit vague. Luckily, proper lease language
clarifies this issue by outlining what can and will be charged against a
security deposit upon the tenant’s departure.
Without a sound lease provision,
landlords often face a fight over money they should be able to collect.
However, there are limits to what the lease provision may contain. Landlords
should consult with their landlord attorney to discuss those limits before
implementing a security deposit provision in their lease.
As with unit damage, landlords left with unpaid charges on
their tenant accounts should rely on a sound lease (and not state statutes) to
determine whether and to what extent a former tenant can be pursued for monies
owed.
Security
deposits serve a vital function in the business of property management. When
used properly, they are an effective deterrent against tenant damage and payment
default. Tune in next month, when we will discuss how to deal with tenants who
attempt to use their security deposit as the “last month’s rent” as well as
other means of limiting losses at the end of a tenancy….
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Section 8: So many contracts, so little time.
In the residential setting, the foundation between a landlord and a
tenant is the lease -- a contract that governs the party’s relationship. In the
market-transaction situation (where there is no government or private agency
subsidizing the tenant’s rent), this relationship is quite literally a straight
line:
In
contrast, the Section 8 tenant brings a third party into the situation – a
Section 8 administrator – and two additional, separate contracts. The landlord
and Section 8 administrator enter a contract commonly referred to as a Housing
Assistance Payments (“HAP”), Housing Choice Voucher Program (“Section 8”),
Rental Assistance Program (“RAP”), or Transitionary Rental Assistance Program
(“T-RAP”) Contract.
The third contract defines the relationship between the
Section 8 administrator and the tenant, commonly referred to as a Section 8
voucher – note that this third contract does not include the landlord at all.
This creates a triangular relationship:
In
this arrangement, the Section 8 administrator is not a party to the
landlord-tenant lease and has no obligation to ensure that the tenant complies
with the lease. Indeed, Section 8 administrators will often refer to the tenant
as a “client” and take steps to protect the tenant in disputes with the landlord
– all while using the landlord to gather information about the tenant’s
noncompliance with the lease! Although seemingly contradictory, the duality of
this approach is based the Section 8 administrator’s two-part mission:
-
To provide decent, safe,
and sanitary housing for tenants whose income would otherwise prevent them
from having such housing, through engagement with private landlords in the
form of rent subsidies and inspection compliance programs; and
-
To
protect the public trust by ensuring that the rent subsidies and inspection
resources are used for only those Section 8 “clients” who follow the Section
8 program’s rules and regulations.
Thus, in order to ensure full rental income and capital asset protection,
landlords must take responsibility for their Section 8 tenant’s compliance with
the lease (including payment of the tenant’s portion of the rent and maintenance
of the unit) by working with the tenant directly and, when necessary, with their
landlord attorney. A Section 8 administrator simply will not assist in these
efforts, because it is not a party to the lease.
While under contract, landlords must comply with all Section 8 terms and
conditions, including maintaining the unit to the Section 8 program’s housing
standards (often called “housing quality standards” or “HQS”), to obtain the
subsidized portion of the rent. Landlords cannot escape these obligations
because of the Section 8 tenant’s conduct (or misconduct), as the tenant is not
a party to that contract. Moreover, when the landlord brings a summary process
(eviction) case against the tenant for such (mis)conduct, the landlord’s
contract with the Section 8 administrator comes back into play – the landlord
must provide the Section 8 administrator with a copy of the “owner eviction
notice” (usually the notice to quit and/or writ, summons and complaint) once
served on the tenant to inform the Section 8 administrator of the tenant’s lease
and/or statutory violations, including nuisance/serious nuisance conduct.
Although it adds another step to the process, the extra notice can actually help
the landlord, as tenants will often change behavior when they realize that their
Section 8 voucher may be in jeopardy.
In
short, landlords must keep in mind the triangular nature of the contracts
involved with a Section 8 residential tenant, and simultaneously focus on
demanding the tenant’s full compliance with the lease and governing statutes
while fulfilling their obligations to the Section 8 administrator under that
contract in order to receive the full rental income and protect their capital
asset.
[TOP]
Section 8: What to do when you want out.
Can a landlord decide not to renew a Section 8 residential tenant’s
lease? Yes, as long as the lease does not automatically renew absent eviction
and the landlord does not base the decision on the tenant’s participation in a
Section 8 program or for any other reason prohibited by the fair housing and
non-discrimination statutes. However, if the nonrenewal is handled incorrectly,
the landlord may face a loss of the Section 8 rental subsidy even though the
tenant is still occupying the unit.
So how do landlords safely navigate this minefield? First, the landlord
must timely notify both the tenant and Section 8 administrator that the lease
will not be renewed. Second, if the tenant fails to vacate and return the keys
when agreed, the landlord should immediately notify the Section 8 administrator
in writing and commence a summary process (eviction) action against the tenant
for lapse of time. Let’s take these steps in order.
Once the Section 8 administrator has received notification that the
landlord will not renew the lease, it will likely begin working with the tenant
to locate a new apartment. Landlords should not be surprised if asked by the
Section 8 administrator to allow the tenant to remain until it and the tenant
find a replacement apartment -- in exchange for a continued rental subsidy. At
this point, the landlord should ensure that the lease contains a holdover clause
turning the lease into a month-to-month tenancy and that all other agreements
are in writing. At a minimum, there should be two written agreements:
·
One between the
landlord and tenant (with a copy to the Section 8 administrator) stating when
the tenant will vacate and return the keys; and
·
Another between
the landlord and the Section 8 administrator confirming that the Section 8
rental subsidy will continue until the tenant vacates and returns the keys.
Take heed! Landlords must be diligent about reading – before signing
– all documents provided by the Section 8 administrator. In the normal course
of business, Section 8 administrators will often present a renewal notice to the
landlord stating that the landlord’s signature is required in order for the
rental subsidy to continue. If the landlord is not renewing the lease, the
landlord cannot and should not sign this form, else the tenant will have
another year of exclusive possession of the unit. In lieu of signing that form,
the landlord must request and get in writing the Section 8 administrator’s
agreement to continue the rental subsidy until the tenant vacates and returns
the keys.
If the tenant refuses to leave by the date promised, the landlord should
keep the Section 8 administrator informed in writing and immediately commence a
summary process (eviction) action for lapse of time. As discussed in the
accompanying article, landlords must remember to send a copy of the owner
eviction notice to the Section 8 administrator, as required by the contract
between the landlord and the Section 8 administrator. This notice is required
to prevent a nightmare scenario for the landlord, specifically a tenant in
possession with no Section 8 rental subsidy. This occurs when the tenant
secures a new apartment, because the Section 8 administrator will focus on the
tenant’s needs – as its client – and transfer the rental subsidy to the new
landlord.
Landlords
are well advised to involve their attorney in each step of the process. Failure
to navigate this road correctly could result in an unintended renewal of the
lease or the loss of the Section 8 rental subsidy well before the tenant vacates
the unit and returns the keys. [TOP]
It's lease renewal time -
do you know where your tenants are?
Each lease conversation we seem to have these days invariably
includes a discussion regarding tenants terminating their lease early. So,
we
thought it might be helpful to discuss the topic so that you can
decide if you are facing a similar situation.
Before we get started, let's make sure we are thinking about the same situation. We are not talking about the resident who, in response to your proposed
renewal letter, simply rejects the offer and decides to move. We are not
talking about the resident who, in accordance with your lease, sends you a
letter sixty days before the lease expires indicating their intent to move out
when the lease expires and thanking you for their wonderful experience as a
resident of your model community.
No, we are talking about the resident who refuses to respond to your
renewal letter and who won’t respond to your phone calls regarding their intent
to renew the lease. We are talking about the resident who, after your letters
and phone calls, remains in the premises after the lease has expired. We are
talking about the resident who calls you on Friday to tell you they are moving
out over the weekend and will leave the keys on the kitchen counter in the
unit. And, we are talking about the resident who didn’t even make that call and
who you only found out when they didn’t pay the rent this month that they’ve
been gone for three weeks.
Question is…what can you do to prevent this from happening, and if it
does, what can you do then?
Prevention is really a matter of being prepared and taking action.
Absent creating a change of heart, preventing the resident from moving out may
be impossible. But, reducing the impact of the move-out on your business is
certainly possible. When you find yourself in the situation that a resident is
not responding to your renewal offer and you have made extra efforts to entice
them to remain under a new lease, you get to decide when you want to take back
control of the situation. Your business does not have to wait for their
lingering decision.
Strong incentives contained in the lease originally signed by the tenant,
along with those in your renewal offer, make up the first step. Your residents are more
likely to sign a new 1-year lease if the rental rate you are offering is a
reasonable increase compared to the automatically increased rent that they pay
as a holdover tenant. So, a sound provision in your lease regarding holdover
tenancies is a must. It is not uncommon to see 25% to 50% automatic increases
imposed on someone who fails to renew their lease but remains as a holdover
tenant in the unit. That would surely entice most people to sign up or ship out!
Your second step is to be prepared to enforce both the holdover provision
of your lease and the renewal provisions. When the resident fails to respond to
your renewal offer, you now have options. You can allow them to remain in the
unit, convert them to holdover residents and start charging them the increased
rent. If they fail to get the hint and sign a new lease, you can
then take
legal action when they don’t pay the rent increase. Another option is to send
them a notice before the lease expires that they must leave at the end of the
lease term. Unless you want them to become holdovers unexpectedly, you should
consult your landlord attorney on taking this approach. This notice, however,
should encourage them to either leave or sign a new lease to prevent an unwanted
eviction.
Strategies on handling residents who fail to respond to renewal
offers should be part of the discussions with your landlord attorney.
Ensure you
know all the legal options that affect your business decisions. Effective
lease provisions spelling out the impact of not renewing and remaining as a
holdover will be vitally important to whatever strategy you pursue.
Regardless of
whichever avenue you take, be committed to it and take action to ensure its
success.
Next
month, we will discuss “skips” and how you can protect yourself.
[TOP]
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