New owner’s obligations for return of security deposit

Once rental changes hands, 1 of 2 things will determine next step

Q: I am a landlord who purchased a small apartment building approximately four years ago. Recently, a tenant who was there when I bought the building moved out, and this is the first time any tenant has moved out since I purchased the property.

She is asking me for her security deposit back.

I don’t believe I ever received any security deposit from the previous landlord. I certainly wasn’t given any check for these security deposits, but I honestly didn’t even think about this until the tenant contacted me.

I told the tenant to contact the former owner, as that is who received the security deposit, but the tenant says it is my job to do that since I am the owner. What is my legal responsibility?

A: If you did not receive the security deposit (either in cash or as a credit in escrow) from the prior owner then it may seem logical that you could simply refer the tenant to the former owner. But here I would say the vacating tenant has a valid point. I would suggest you immediately check your own records carefully.

What usually happens in the sale of residential rental properties with tenants in place is the seller gives the buyer a credit in escrow for the amount of all of the security deposits. Many times there is a written acknowledgment that is signed by both the seller and buyer, and often the tenants as well (sometimes as part of an estoppel agreement). Most purchase and sale transactional documents contain clauses that specifically reference how the issues of the security deposits will be handled in the change of ownership.

Also, most escrow companies are going to specifically look for language about the disposition of security deposits in the escrow instructions they receive that are signed by both the buyer and seller, as they will make sure to comply with state laws, if any. Since this is routinely handled in most transactions, it just may not have been something you knew about.

I would suggest you start by pulling out your records from when you purchased the property. See if you received a credit in escrow or a cash payment for the security deposits. You should also look at any rent rolls or listing of tenants and their security deposits that were part of the records turned over by the former owner to make sure they had a security deposit and that you know the amount.

If you did receive cash or an escrow credit, then you have been holding the tenant’s security deposit whether you realize it or not. You should then process a refund of the security deposit less any reasonable charges for damage beyond ordinary wear and tear. If you did not receive the security deposit from the former owner, you should attempt to contact the former owner directly on behalf of this tenant.

Q: I have been renting a single-family home from a private owner for six years. He just sent me a letter requiring me to get renters insurance. Is he able to do that? And what if my income won’t allow it? Please help me understand what I have to do and why I would need this insurance coverage.

A: Yes, the owner can change the terms of your tenancy to now require you to carry a reasonable amount of renters insurance, and he will likely ask you to have your insurance company name him as an additional insured under the policy.

The only requirement is that he must give you proper legal notice. That would typically be at renewal time if you are on a lease or upon 30 days’ written notice if you are on a month-to-month rental agreement.

Any financial challenges you have are not grounds to refuse to get a renters insurance policy. These policies aren’t that expensive, and they protect you as well as the landlord.

Your landlord certainly has liability and casualty insurance to protect his interests (and the interests of the lender if there is a mortgage). So you may think that your landlord has insurance that would cover your possessions and pay any claims in the event of a fire or other event that damages the rental property and your personal property. But the landlord’s insurance covers only the buildings and the landlord’s personal property. That is why it is always an excellent idea for tenants to have renters insurance.

This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of "Property Management for Dummies" and "Property Management Kit for Dummies" and co-author of "Real Estate Investing for Dummies."

Email your questions to Rental Q&A at rgriswold.inman@retodayradio.com. Questions should be brief and cannot be answered individually.

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