Landlord Lawyer By Will Brownlee, Brownlee Law Firm, PLLC / Loebsack & Brownlee, PLLC
Dispelling Common Landlord Myths: Security Deposits – Actual Damages and Flat Fees
As many readers of this column know, “landlord myths” are items of information that many property managers, and even some attorneys, generally assume to be true, though they are actually falsehoods. As with one of my favorite television shows, Discovery Chan- nel’s MythBusters, we seek out certain disturb- ing myths and then seek to explore them and examine them as to their truth or falsity. In this column, we have now analyzed and writ- ten off a couple of dozen of these myths as untrue. Let’s “bust” another one, shall we?
MYTH: A residential security deposit is a source of money that can be spent by the landlord on whatever debt the resident owes. Put another way, if there is any sort of charge on the resident’s ledger, then it is fair game to use the security deposit to pay it.
As with most myths, this statement mixes a bit of truth with falsehood. Worse, it is such a common myth throughout the industry that many landlords, owners, and management companies often view the security deposit as a convenient source of money to pay mostly anything having to do with the resident – whether the charges may arise from termina- tion fees, so-called “insufficient notice fees” (which don’t really exist under the AANC and NAA Leases, by the way – more on that in the next issue of the ApartMentor), as well as more conventional fare, such as unpaid rent, late fees, and physical damages to the rented premises. However, residential security de- posits are among the most regulated aspects of North Carolina, and there are very limited categories of charges which may be applied to a security deposit. This is the heart and soul of the myth – and thus, it is where we will begin our discussion.
A RATHER SMALL LIST OF CHARGES
In North Carolina, a residential security de- posit may only be applied to eight categories of charges, to be precise. As N.C. GEN. STAT. § 42-51(a) states:
14 the ApartMentor | July/August § 42-51. Permitted uses of the deposit.
(a) Security deposits for residential dwelling units shall be permitted only for the following: (1) The tenant’s possible nonpayment of rent and costs for water or sewer services pro- vided pursuant to G.S. 62-110(g) and electric service pursuant to G.S. 62-110(h)[Author’s note: this refers to submetered water and prorated electric service for by-the-bedroom rentals].
(2) Damage to the premises, including damage to or destruction of smoke alarms or carbon monoxide alarms.
(3) Damages as the result of the nonful- fillment of the rental period, except where the tenant terminated the rental agreement under G.S. 42-45, G.S. 42-45.1, or because the tenant was forced to leave the property because of the landlord’s violation of Article 2A of Chapter 42 of the General Statutes or was constructively evicted by the landlord’s violation of G.S. 42-42(a). (4) Any unpaid bills that become a lien against the demised property due to the ten- ant’s occupancy. (5) The costs of re-renting the premises after breach by the tenant, including any reasonable fees or commissions paid by the landlord to a licensed real estate broker to re-rent the premises. (6) The costs of removal and storage of
the tenant’s property after a summary eject- ment proceeding. (7) Court costs. (8) Any fee permitted by G.S. 42-46
[Author’s note: this refers to late fees and authorized eviction filing fees].
(emphasis added). Any charge outside of this list is not a permissible use of the security de- posit. You may notice certain omissions from this list: termination fees, breaking of lease fees, insufficient notice fees – essentially, any fee or charge that falls outside this exact list. Attempting to charge any fees outside of this list against the deposit is not only improper and a violation of N.C. GEN. STAT. § 42-51, it may also expose you to other issues as well.
Since N.C. law requires that all security depos- its be maintained in a trust account (except for those landlords who, in rare circumstances purchase a bond equivalent to the sum of all deposits on hand), and since all management companies should have a licensed broker- in-charge who is responsible for the proper maintenance of those trust accounts, improper deductions from a security deposit could be revealed during a random audit by the N.C. Real Estate Commission, thus subjecting the broker-in-charge and management company to discipline.
WHAT ABOUT DAMAGES TO THE PROPER- TY CHARGED PURSUANT TO AN AGREED- UPON SCHEDULE OF FLAT FEES? A DISCUSSION OF ACTUAL DAMAGES
There seems to be a trend in the rental in- dustry to charge for damages to the premises through the use of agreed-upon flat fee charges. Put another way, a community may have a list of standard charges for certain commonly-replaced or repaired items – for example: Drip Pans: $10.00; Single-Window Blinds: $50.00; Kitchen Linoleum: $200.00; and so forth and so on. Though the actual cost of such items varies widely, the appeal of such flat fee charges is in their simplicity and pre- dictability, arguably for the benefit of all par- ties, especially where the landlord and tenant have agreed on such charges in advance via an addendum to the lease. The landlord and tenant also have the benefit of faster account- ing, where the landlord does not have to wait to learn the actual cost of the item; the mo- ment the landlord learns that a replacement is necessary, the landlord can immediately charge the resident as part of closing out the rental account. Last, if the flat fee schedule is crafted carefully, the landlord may well make a small profit on such fees where the actual cost of the replacement items was less than the flat fee charged. Given the above, you may see the appeal in using such flat fees.
[As an aside, if you are attempting to use such a damage fee schedule without making such
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