A refundable security deposit is normally returned to a tenant when all of the terms of the lease agreement have been met. But what happens to the security deposit if the tenant breaks a lease and moves out early?
In this article, we’ll explain how a landlord can keep the security deposit when a tenant breaks a lease, along with some other common reasons for not returning a security deposit to a tenant.
What is a Security Deposit For?
A security deposit is money a landlord receives from a tenant to help guarantee that the terms and conditions of the rental agreement will be fulfilled. What a landlord can use a tenant’s security deposit for varies based on each state’s landlord-tenant laws.
In general, a security deposit may be used to pay for damages to the property beyond normal wear and tear, and may be applied to money the tenant owes the landlord for unpaid rent or eviction fees.
For these reasons, it’s a good idea for a landlord not to agree to apply the security deposit toward the last month of rent, because damages or past due monies owed by the tenant may exceed the security deposit amount.
Remember that a security deposit is not the same thing as extra rent. Tenant security deposits that are refundable appear on the landlord’s balance sheet as a short-term liability. That’s because the security deposit will eventually have to be given back to the tenant, assuming the terms and conditions of the lease are met.
Why a Large Security Deposit is Good
Landlords sometimes try to minimize the amount of money a tenant has to pay upfront before moving into the house to make the property more affordable. Those intentions might be good. However, landlords who don’t collect the maximum security deposit allowed by law may be creating problems for themselves down the road.
While some states do not have a statutory limit on the amount of security deposits landlords can charge, the security deposit limit in many states is an amount equal to between one and two months of rent. The legal resource website Nolo.com has created a chart of security deposit limits state-by-state.
There are three main reasons why collecting as large a security deposit as possible is a good business practice for landlords to follow:
- Discourages tenants who really can’t afford the total monthly rent (including paying for utilities and renters insurance) from filling out a rental application.
- Acts as an incentive for tenants to pay their rent in full and on time because if they do not they know the large amount of money paid as a security deposit may be at risk.
- Helps to prevent tenants from doing a “midnight run” by abandoning the rental property and quickly moving out in the middle of the night.
Include a Lease-Break Fee in the Rental Agreement
One good way for a landlord to ensure he can keep the security deposit if a tenant breaks the lease is to include a “lease-break fee” in the rental agreement.
Also known as an early termination fee, a lease-break fee is paid by a tenant who wants to break the lease and leave early. A fee for breaking the lease could be equivalent to two or three months of rent, part of which is paid for using the security deposit, with the tenant owing the rest.
Including a lease-break fee in the rental agreement may also end up making extra money for the landlord. For example, if the lease-break fee equals three months of rent and the property is rented to another qualified tenant in just one month, the remaining two months of rent from the lease-break fee are similar to the landlord receiving free rent.
Reasons for Keeping the Tenant Security Deposit
A security deposit can’t force the tenant to keep renting, but a security deposit can help a landlord collect the money that is owned by the tenant.
The rental agreement with the tenant and the landlord-tenant laws for the state the rental property is located in will describe exactly when a landlord can keep all or part of the tenant security deposit.
In most jurisdictions, reasons for keeping the tenant security deposit include:
Late or missing rent payments
A security deposit may be used to pay for the remaining rent a tenant owes if the tenant abandons the property or is evicted. In both cases, a landlord will need to obtain a judgment from small claims court in order to recover the debt.
Depending on how the lease is written and the local landlord-tenant laws, a landlord may also be able to charge the tenant for eviction and collections costs, along with interest on the unpaid debt. That’s because in some cases, it is possible for the total debt owed by the tenant to exceed the amount of the security deposit allowed by state law.
Breaking the lease before the termination date
Residential rental agreements are legally binding contracts, in the same way that financing a car or using a credit card are. If the user stops making payments, the creditor has the right to take back the automobile, close the credit account, and pursue the debtor for damages.
Sometimes, a tenant will fail to honor the contractual obligations of the lease, including paying the rent and taking care of the property until the lease ends. When this occurs, a landlord may be able to use the security deposit to help pay for monetary and physical property damages caused by the tenant.
If a tenant breaks the lease before the termination date, the cash flow the landlord receives from the rental property is reduced.
In addition to missing rental income, the property will have to be cleaned and made ready for a new tenant sooner than expected. The landlord will also be forced to spend money marketing the vacant property, screening tenants, and possibly paying another leasing fee.
Excessive cleaning when the tenant leaves
Cleaning a rental property in between tenant turns is part of the normal cost of business in owning and managing housing. For example, trash left out at the curb until the next collection or a carpet that needs to be steam cleaned would both be normal cleaning costs.
On the other hand, if the refrigerator is left full of moldy food, the bathrooms look like public toilets, or there are grease and oil stains on the living room floor, a landlord may be able to use part or all of the security deposit to pay for excessive cleaning when the tenant leaves.
Property damage beyond normal wear and tear
The precise definition of “normal wear and tear” varies between states, but the term is generally used to describe how long items are expected to last over a given period of time. The fact is that almost everything eventually wears out, even with the best possible care.
That’s one reason why the IRS allows rental property owners to depreciate the cost of items like stoves, refrigerators, and carpets over a period of five years (IRS Publication 527, page 9).
Of course, appliances and flooring can last much longer. But a landlord who tries to charge a tenant for replacing a 10-year old refrigerator may find himself on the wrong side of the law if the tenant decides to take the landlord to court.
Examples of normal wear and tear include small stains or worn areas of the carpeting, grout that needs to be cleaned, or door handles and locks that need to be adjusted.
By contrast, excessive damage includes large holes in the wall, water damage under the kitchen sink or bathroom vanity, or smashed windows and doors. A landlord may be able to use all or part of the tenant’s security deposit to pay for damage beyond normal wear and tear.
Unpaid utilities or other bills
In most single-family rental homes, the tenant is responsible for directly setting up accounts with the local service provider and paying for utilities such as electric, water and sewer, and gas.
However, in some utility districts, the property owner may legally be held liable by the utility if the tenant has unpaid utilities. That’s because in the view of the utility company and the local legal system, the utilities were being provided to the real property and not to the tenant.
While that may seem like a subtle legal distinction, it’s also why a landlord should ask their local property manager about the potential liabilities a landlord has if the tenant doesn’t pay the utilities.
If a landlord could ultimately end up paying the tenant’s bill, examine the rental agreement for a clause allowing the tenant security deposit to be used for unpaid utilities or other bills owed by the tenant.
Reasons Why a Tenant Can Break a Lease
Up to this point, we’ve discussed reasons why a landlord can keep the security deposit if the tenant doesn’t honor the terms and conditions of the lease they signed. However, there are also some instances where a tenant may have the right to break a lease and expect to have their security deposit returned:
Military personnel called for active duty have the right to terminate a residential lease by giving the landlord 30 days’ written notice along with a copy of his or her military orders, as part of the Servicemembers Civil Relief Act (SCRA).
Landlords who breach the tenant’s right to quiet enjoyment by conducting an unusual number of inspections or visiting the property without notice may give the tenant a valid reason to break the lease.
Another reason why a tenant can break a lease is if a landlord breaks the implied warranty of habitability, which is a legal doctrine guaranteeing the rental property is habitable and meets basic living and safety conditions.
Where to Find Security Deposit Limits by State
Four of the best online resources to find security deposit limits for each state are:
- The Balance Small Business: Security Deposit Limits by State
- Nolo.com: Chart of Security Deposit Limits, State-by-State
- Landlord.com: Security Deposit Laws & Statutes Guide by State
- Rentec Direct: Security Deposit Laws, Limits & Deadlines – State Guide for Rentals
Final Thoughts on This Topic
While each state has specific landlord-tenant laws that dictate how a deposit can be used, in general a landlord can keep the tenant security deposit when a tenant breaks a lease. Some states have no limit to how large a tenant security deposit can be, while others limit the security deposit to an amount equal to one to two months of rent.
One good way to keep the tenant security deposit is by including a lease-break fee in the standard rental agreement.
In most markets, the demand for rental property is incredibly strong. So, if a landlord collects a lease-break fee of three months and the property gets re-rented in just one month, the remaining two months of break up fees are like having free rent that increases the property cash flow and ROI.
