SECURITY DEPOSIT TRANSMITTAL LETTERS: How To Draft A Legal 21-Day Letter
Security deposit withholding issues are the second most litigated area in landlord tenant law after evictions. If a landlord makes improper deduction from a tenant’s security deposit, pursuant to ATCP 134 and §100.20, Wis. Stats., the tenant may sue the landlord for double damages and attorney’s fees. There are numerous published Court of Appeals decisions in Wisconsin dealing with this exact issue. I would like to offer a few suggestions to landlords which will hopefully keep you from making any improper security deposit deductions.
First, we need to address some basics . . .
A security deposit is defined as "any payment that is given to a landlord as security for the performance of the tenants obligations under the rental agreement." ATCP 134.01(11).
ATCP 134.06(2), states that "within 21 days after a tenant surrenders the rental property, the landlord shall deliver or mail to the tenant the full amount of any security deposit held by the landlord, less any amounts properly withheld by the landlord."
If you would like to know what a landlord may legally deduct from a tenant’s security deposit you will want to read my Jan. 17th post.
ATCP 134.06(4), states "If any portion of a security deposit is withheld by the landlord, the landlord shall, within the time period and manner prescribed in sub.(2) – 21 days -- deliver or mail to the tenant a written statement accounting for all amounts withheld. The statement shall describe each item of physical damages or other claim made against the security deposit, and the amount withheld as reasonable compensation for each item or claim."
I will refer to this written statement interchangeably as either the "security deposit transmittal letter" or the "21-day letter."
According to ATCP 134 all prepaid rent in excess of one month is legally considered to be a security deposit. So if you require a new tenant to pay first and last month's rent plus a security deposit, legally the security deposit will also include the last month’s rent
Essentially a landlord must either return a tenant’s security deposit or send the tenant an itemization of how the tenant’s security deposit was applied within 21 days after the tenant surrenders the premises. This is mandatory. No matter what the situation – even if you are legally entitled to keep all of the tenant’s security deposit – you must still send the tenant a letter explaining to them why you can legally keep it and how it was applied. There is no situation in which you should not be sending the 21-day letter to a vacating residential tenant in Wisconsin. Even if common sense tells you it is not necessary (i.e. the tenant told me to use his/her security deposit to pay for the last month’s rent) you should still send out the letter. If you are wrong the ramification may be expensive. Be safe - send the letter each and every time.
As I mentioned in a previous post about what a landlord can legally deduct from a tenant’s security deposit, ATCP 134.06(3) states that you can only deduct the following from a tenant’s security deposit: (1) damage, waste, neglect, (2) unpaid rent, (3) utility costs, (4) any other items properly identified in a document called Nonstandard Rental Provisions (NSRP).
Note: There are two additional items listed in ATCP 134.06(3) which may be deducted from a tenant’s security deposit but they are not very common so to keep things simple I have not chosen not to mention them in this post.
So if you are not using a NSRP then legally you may only withhold for rent, utilities, and damage or waste or neglect. That is it. Nothing more. If you would like to be able to legally deduct other things from a tenant’s security deposit such as late fees, insufficient funds fees, actual costs charged by a municipality that the landlord had to pay resulting from the tenant’s failure to cut the grass or properly dispose of recyclables etc. -- then you must have those deduction listed in your NSRP and signed or initialed by the tenant.
Many landlords get into trouble because they wait until the last day to send out the letter. You only have 21 days from the date that they tenant "surrenders" the unit.
ATCP 134.06(2)(b) defines "surrender" as follows:
a. The last day of the tenancy provided under the rental agreement.
b. If tenant vacates before the last day of the tenancy and gives landlord written notice that they have vacated, then surrender occurs when the landlord receives the written notice.
c. If tenant vacates after the last day of the tenancy, then surrender occurs when the landlord learns that the tenant has vacated.
d. If tenant is evicted, surrender occurs when the writ is executed by the Sheriff or when the landlord learns that the tenant has vacated, whichever occurs first.
If that sounds a bit confusing to you that is because it is confusing! So the key is to not wait until the 21st day to send out the letter. Send it out as soon as you can. Don’t wait until the 21st day to mail it to the tenant because there is always a chance that there will be a dispute as to what day the tenant "surrendered the property."
A client of mine was once sued for failing to return a tenant’s security deposit within the required time period. The tenant allegedly dropped off the keys in the rental office drop box on a Sunday before the Memorial Day holiday. The office was closed on Monday because of the holiday so my client didn’t learn that the keys were returned until she came into the office and noticed them on Tuesday following the holiday. My client considered the date of surrender to be on Tuesday. My client mailed the tenant’s entire security deposit to them on the 21st day from that Tuesday.
The tenant sued my client arguing that the 21-day letter and the enclosed return of the security deposit was sent on the 23rd day rather than the 21st day after surrender. The tenant argued that the date of surrender was on the Sunday when the keys were dropped off rather than on the Tuesday when my client discovered them. The court commissioner handling the case agreed with the tenant. My client had returned the tenant’s entire security deposit to him but nonetheless was still ordered to pay double damages and a reasonable attorney fee.
While I disagree with the decision of the court commissioner (based on the definition of "surrender" and for equitable reasons - the tenant got the entire deposit back) that is not the point. The point is that my client should never have waited so long to return the security deposit to the tenant. Since my client was returning the entire security deposit to the tenant there was no need to obtain estimates for damage to the unit or have repair work completed. They could have easily mailed it back 2 days earlier, or 5 days earlier, or 2 weeks earlier for that matter. There is no reason to wait the full 21 days.
Yes, I realize that sometimes you may need additional time in order to properly identify all the tenant damage and obtain estimates for those repairs. Sometimes that will be the case. But oftentimes there will be no reason to use the entire 21 days to return the deposit or send the letter, but yet this is what many landlords do. This leads to my second suggestion.
ATCP 134 only requires that a landlord account for how the security deposit was applied. It does not say that you must provide the tenant with a complete written list of all damages or money owed – just enough to explain how the security deposit was used.
Here is an example:
Tenant, Joe Smith, vacates the property on the last day of the month of January. While the tenant provided proper notice to terminate his tenancy he failed to pay January’s rent. Mr. Smith left the rental unit in a mess. There was damage, beyond normal wear and tear, to the carpeting, walls, and floors. There were window screens missing. Window blinds were trashed. The place was essentially left a mess and the cost to repair the damage will be very expensive.
Question: Under this scenario, when should the landlord send out the 21-day letter?
Answer: The landlord should send out the 21-day letter the day after the tenant vacated - Feb. 1st.
If rent is $500 and the tenant failed to pay the last month’s rent then you have all of the information that you need to notify the tenant why they are not getting their security deposit back. Remember you are only required to explain how the security deposit was applied. You are not required to notify the tenant within 21 days of all the damages that the tenant owes you because he trashed the place.
In the above example, the tenant failed to pay January’s rent in the amount of $500 which just so happens to be the same amount as the tenant’s security deposit. So even if there are lots of damages to the unit you can still send out the 21-day letter the day after the tenant surrenders the unit because you have enough information to account for the application of the security deposit. Your letter should simply state that the tenant failed to pay the last month’s rent for which he was legally responsible and that you will be applying his security deposit of $500 toward the last months’ rent and no portion of his security deposit is being returned. You have now complied with the ATCP 134 regulations.
Now you can take your time, if needed, to obtain estimates for all the tenant-caused damage to the unit and send the tenant a separate letter on a later date notifying him of the additional money he owes you.
By remembering this simple rule it has been my experience that many 21-day letters can be mailed out well before the 21 day period closes.
3. If you are able, make only "slam dunk deductions" from a tenant’s security deposit.
"Slam dunk deductions" are deductions that the tenant would have a difficult time arguing about. If you have enough "slam dunk deductions" to cover the entire security deposit then the tenant is less likely to sue you for allegedly making an improper deduction from his/her security deposit. Examples of "slam dunk deductions" would be items such as rent and/or utilities. As long as you have a written rental agreement with the rent amount listed and it indicates what utilities the tenant is responsible for paying, these two types of deductions tend to be the safest to make. This is not always the case (especially if there are arguments about if proper notice to vacate was given by the tenant) but for the most part rent and utilities are safe items to deduct.
In my 15 years of representing landlords, I have found that most tenants will be truthful and admit if they did not pay rent and if they failed to pay their utilities. However, tenants are rarely willing to concede that they left the place a mess or that they caused damage. I am not sure why this is - someone should conduct a study of this! As such, deductions for repairs or cleaning charges are NOT "slam dunk deductions." Rather they are deductions that often are disputed by tenants - so try to avoid them if possible. Keep things simple and you will lesson you exposure to a lawsuit.
Let’s take the example mentioned above and change the facts. Assume that the tenant, Joe Smith, did pay the last month’s rent and did not owe any utilities, and therefore the only possible legal security deposit deductions that you could make are the non-slam dunk items related to the property damage. Under this scenario, my "slam dunk deductions" theory is not helpful, so you must proceed to my next suggestion.
4. Itemize all deductions separately and clearly, and enclosing all invoices for the cost of repairs (or estimates if the work has not been completed), photographs, copy of the Check-In/Check Out Sheet, and always error on the side of caution.
If the only legal deductions that can be made from a tenant’s security deposit are for damages to the unit then you very well may need most of the 21 days to obtain your estimates and or make the repairs. If you are unable to have the repairs completed or even obtain estimates within 21 days you still are required to send out the 21 day letter. In that situation I caution you to error on the side of under-estimating the cost of the repairs.
You 21 day letter should be clear and detailed. The purpose of the letter is to explain to the tenant what happened to their deposit. If you are clear in your explanations as to how that deposit was applied there is less of a chance that your tenant will sue you. If the tenant cannot understand the deductions that you made because you did not clearly explain them in the letter or your handwriting is illegible then s/he may think that you are treating them unfairly and that will increase the chances that they will sue you.
Take photos of the damage left behind by the tenant. Hopefully you also have photos that were taken prior to the tenant moving in which will show that the damages caused by the tenant were not preexisting. A Check-In/Check-Out form which you and your tenant completed at the outset of the tenancy, noting any pre-existing damages prior to them moving in, will also be helpful.
If you take the above precautions there will be a better chance than not that a tenant will not sue you for making improper security deposit deductions because s/he will be able to understand the deductions that you made and s/he will also know that you have evidence to support your deductions. Even if the tenant does decide to sue you, you will now be better prepared to defend yourself in court if that is where you end up.
Keep in mind, that if you are unsure whether you can adequately prove that your tenant caused the damage then it is safer to not make the deduction from their security deposit. You will need to engage in some cost-benefit analysis as well as analyze your willingness to take risk. Ask yourself if the $100 deduction that you want to make (and which you cannot adequately support) is worth the chance of having to pay the tenant double damages ($200) plus the hundreds or thousands in attorney’s fees if a court commissioner or judge disagrees with you.
ADDED ON APRIL 21, 2010 --- The law does not require that all damages be prepared prior to you making a deduction from a tenant's security deposit. Unfortunately many courts do not realize this. It should be noted that the Department of Agriculture, Trade and Consumer Protection, the governmental entity that drafted ATCP 134 and the encompassing security deposit regulations, stated in its 1999 Summary of ATCP 134 Revisions, that "if repair costs are not known within 21 days, a written accounting must still be provided. In this case, a 'good faith estimate' may be made."
5. Send the 21-day letter via certified mail.
I always recommend to my clients that they send the 21-day letter (whether it includes the return of security deposit money or not) via certified mail. Why? Because the certified mail receipt is proof of the date that you mailed it. You do not want to be stuck in a "he said - she said" argument with your tenant as to the date you mailed the letter when you are before a court commissioner or judge. The certified mail receipt gives you additional evidence besides "your word" as to when you mailed the letter. Yes, it does cost more to mail a letter certified. And yes, if you have to mail out many 21-day letters this cost can add up. Once again, you will need to evaluate whether or not foregoing the certified mail option is worth the possibility of having a court rule that you did not mail the security deposit transmittal letter timely.
6. If no forwarding address is provided then mail the 21-day letter to the tenant’s last known address.
Send the letter to the tenant’s new address if they provided you with one. But if they didn’t, which seems to be the norm, then ATCP 134. 06(5) says that you should mail it to their last known address. Yes, I do realize that the tenant’s last known address is the address of your rental unit which the tenant just vacated - but as silly as that may seem you should still do it.
ATCP 134 says that you must mail or deliver the security deposit transmittal letter to the tenant - it does not say that the tenant needs to receive the letter. Yet another reason why I suggest certified mail. If the letter is returned to you - do not open it. Keep it in your files for a while to see if the tenant contacts you. If the tenant decides to sue you - having the unopened letter with a date from the U.S. Post Office on it showing when you mailed the letter - should be all the evidence you need to prevail in court.
7. If you have multiple tenants then the refund should be made payable to all of the tenants.
If more than one adult is on the rental agreement, assuming that you are returning their security deposit, you should make the refund payable to all of the adult tenants.
Your check could read:
Made Payable To: Tenant A, Tenant B and Tenant C
It is not your role as a landlord to decide who contributed what portion of the security deposit. The tenants entered into one rental agreement with you (not three individual agreements) for the entire rental unit and they paid one security deposit as a group. You should return the security deposit to all of them and let them determine how to split it up. The only exception to this rule is if the tenants provide you with notice, in writing, signed by all of them, advising you who the return of the security deposit should be made payable to.
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The above suggestions cover the most common mistakes that I have witnessed regarding security deposit deductions over the years. While I cannot promise you that if you follow my suggestions that you will never be sued by a tenant for making an improper security deposit deduction, I can tell you that you will significantly reduce your exposure to such a lawsuit.
