Guest blog by Jaclyn Bacallao, Student at Chicago-Kent College of Law
While collecting security deposits can provide financial protection to landlords from unruly tenants who may cause property damage. Security deposits can become a major liability to landlords. In Chicago, if a landlord commingles security deposits with the rents, fails to pay interest on security deposits or issue security deposit receipts, the tenant can sue the landlord for two times the security deposit plus interest AND attorneys fees. In other words, a security deposit suit from a tenant can be a major loss to landlords! In Chicago, the Residential Landlord and Tenant Ordinance (“RLTO”) sets out the landlord’s obligations concerning security deposits, and the courts do enforce this ordinance. Given the penalties, it’s just not worth it to violate RLTO to save a few bucks for the sake of convenience.
Be aware that RLTO applies to the vast majority of Chicago landlords with some limited exceptions. To determine whether you are required to comply with RLTO, check out Section 20 of the ordinance.
WARNING: Penalties for Failure to Comply with RLTO Can Hurt Your Bottom Line
Because the penalties in RLTO are so bad for landlords and it’s easy for tenants to find a lawyer who will sue their landlords, I’m going to explain the penalties for violating RLTO first. Section 80 holds landlords who violate any of the security deposit requirements liable for damages equal to two times the security deposit plus interest. For example, if a landlord collects a $3,000 security deposit from a tenant, commingles the security deposit, and fails to pay the interest and issue the security deposit receipt, the landlord could incur a liability of $6,000 plus interest to be paid to the tenant – in addition to refunding the security deposit. (Check out more about refunding the security deposit in Rentalution’s Blog on Wear & Tear).
TENANTS CAN EASILY PROVE THEIR CASE AGAINST YOU. When an angry tenant walks into a lawyer’s office, the first thing that the lawyer asks the tenant to produce is a cleared security deposit check, a cleared rent check, and the security deposit receipt. By examining the cleared checks, the lawyer can easily determine whether commingling has occurred because the back of the checks indicate the accounts through which the checks cleared. If the accounts are the same, the lawyer may have enough evidence to prove that the landlord commingled funds and violated RLTO. If the tenant cannot produce these documents, the tenant can propound discovery requests on the landlord to produce them. In other words, these cases can be a slam-dunk for the tenant if you messed up!
Here are some examples to illustrate how security deposit suits can play out. (1) Your tenant’s dog ate the carpet, and you want to take money out of the $3,000 security deposit to cover the damage. The tenant doesn’t want to pay for the damaged carpet and sues you for a security deposit infraction. Now, you owe the tenant $5,500: $6,000 for the RLTO violation less the $500 to pay for the repairs. (2) The tenant has three months left on the lease and wants to break it during the middle of winter, but you want to enforce the lease because it’s going to be hard to find a tenant. The tenant then threatens to sue you over a security deposit violation. Knowing that this lawsuit can cost you thousands, you let the tenant out of the lease.
Additionally, lawyers who take tenants’ cases in these situations often charge on a contingent fee basis, meaning that the tenant does not have to pay any legal fees unless the lawyer wins. Alternatively, the tenant can also recover attorney’s fees and court costs against you under Section 180 if the tenant wishes to pursue that route. There is no shortage of lawyers these days (just check out Google and Yelp), and an angry tenant can easily get a judgment against a well-intentioned landlord for simple mistakes. Because of the potential pitfalls associated with security deposits, some landlords have opted for charging a move-in fee in lieu of collecting a security deposit.
The bottom line: it’s just not worth it to violate RLTO for the sake of convenience! With RLTO on the tenants’ side, landlords can easily find themselves in a situation costing them thousands of dollars.
Here’s how to protect yourself:
Security Deposit Receipt
According to Section 80(b) of RLTO, landlords must provide tenants with a receipt for the security deposit that includes (1) owner’s name, (2) the date received, (3) a description of the apartment, and (4) the signature of the person accepting the security deposit (ie, the landlord or property manager). Electronic receipts are permissible only if the security deposit was paid via an electronic funds transfer. Failure to comply with these rules entitles the tenant to get the security deposit back immediately. Even if the landlord includes three of the four items listed above, the landlord has still violated RLTO, and the landlord could still be held liable for a violation. Make a security deposit checklist, check it twice, and stick to it!
Commingling Security Deposits and Rents
According to Section 80(a) of RLTO, security deposits also cannot be commingled with the landlord’s other assets. Commingling the security deposit means depositing security deposit funds into the landlord’s personal bank account or the same account in which the landlord deposits rents or pays any expenses associated with the property. The security deposit also cannot be used as collateral for any loans.
To comply with RLTO, landlords should set up separate accounts for security deposit collection and rent collection, and landlords should get separate checks from their tenants for the first month’s rent and the security deposit. This rule was designed to protect tenants because the security deposit actually belongs to the tenant throughout the duration of the lease. Just be aware that the rule applies to everyone, including well-intentioned landlords who commingle security deposits and keep immaculate accounting records.
Finally, Section 80 requires security deposits to be held in federally insured interest-bearing accounts with financial institutions located in Illinois, and the written rental agreement must specify the financial institution where the security deposit is held.
Remember: the penalty is still twice the security deposit plus interest and attorney’s fees for commingling security deposits, and the courts don’t care if you commingled by accident.
Interest on Security Deposits
Section 80(c-d) requires landlords who hold security deposits for six months or longer to pay interest on the security deposit to the tenant. Interest accrues starting on the first day of the rental term and must be paid to the tenant within 30 days after the end of the 12-month lease or within 45 days if the tenant moves out. Therefore, even if a tenant renews the lease, the landlord must still write a check to the tenant for the interest due. In Section 82 the city comptroller sets the statutory interest rates every year so that landlords can calculate the interest payments.
Interest rates are announced at the following link Security Deposit Interest Rates.
About the author: I am a student with the Entrepreneurial Law Clinic at Chicago-Kent College of Law. The Clinic provides startups and small businesses with high-quality, affordable legal services. Check out our website if you are interested in our services.
Disclaimer: I’ve been taught in law school that I have to include a disclaimer or else my professors will be disappointed with me. So here it is: This blog entry does not constitute legal advice and is available for educational purposes only. Like any other law, RLTO can change – be sure to check it. If you have additional or specific questions, consult a lawyer. Finally, by using this blog you understand that there is no attorney client relationship between you and the author/publisher.
