Security Deposits - Why do people not get these back when the landlord forecloses?

I read yet another article about a renter being evicted when the home owner they were renting from foreclosed. This one states that the lady has lost her security deposit. I recall most of the articles I have read about these scenarios state something similar.

Why is this? In every state I have rented (Florida, Georgia and California) my lease explicitly stated where the security deposit funds would be located. I would have thought that this was to ensure these funds remained accessible in case your landlord went bust. I had always thought of it as more of an escrow style thing, where it never really becomes the landlords money. Is this not the case? What is the typical legal status of this money (I am guessing this depends on the state)?. It doesn’t make sense to me that the deposit would enter the general funds of the landlord and therefore be at risk if they go bankrupt.

This is not something that I am worried about from a personal perspective, just a general curiosity.

The story you link is from New York, and according to this site:

Doesn’t say what happens in the event of foreclosure.

Of course, even if the landlord has indeed broken the law, the question now is whether the tenant can do much about it. Pursuing it as a civil matter is probably a lot of trouble with little chance of success; i wonder if it could be reported as a criminal matter?

This sort of thing couldn’t happen in Australia, or at least in New South Wales. When i was renting in Sydney, the law was that all rental bonds (our name for a security deposit) had to be lodged by the landlord with the Rental Bond Board, a government agency. The RBB would place the money in an account, at interest, and it would be returned at the end of the lease. The RBB also acts as an arbitrator of sorts, if disputes arise between landlord and tenant over how much of the bond is to be returned.

Here’s a page from the California Department of Consumer Affairs on Security Deposits. I didn’t read it very closely, but I don’t see anything about security deposits being held in escrow. It states that you can sue your landlord for failure to return a security deposit, which implies that the funds aren’t held in escrow, and are in fact paid to the landlord.

For what it’s worth, I’ve rented three places, and none of them specified in the lease where the security deposit would be held.

Even if you can sue the landlord, it doesn’t do much good if he’s actually bankrupt, and even if he’s solvent and you win, you still have to collect, and even if you collect many months later, that doesn’t do you much good when you’ve just gotten kicked out of your home and need to find another one ASAP.

There is some variation among jurisdictions, but this states the basic legal principles involved:

And see:

Of course, as others have pointed out, the landlord’s insolvency and a queue of other creditors seeking to collect may make these rights very theoretical.

In Minnesota landlords are required to hold security deposits in escrow. I’m amazed more states don’t require that.

That’s also the case here in Washington. I had to file suit against my previous landlord for not returning my deposit (strangely, he felt that my deposit was his to spend on new carpet so he could sell his house). He’d never given me the receipt of his putting my deposit money into a separate account, so I was planning on using that little fact if the case went to court. Luckily, he realized that he was completely screwed and gave me the full refund before the court date.

Assuming it’s the new owner who actually does the eviction, in California at least, if you don’t get anything from the previous landlord, you can also go after the new owner. Here’s a quote from California Civil Code Section 1950.5:

I’m not your lawyer. Before you go and sue Wachovia when you get evicted, go talk to an attorney.

Thanks for the interesting information. It looks like it is all over the place depending on the state. An escrow system like Minnesota makes more sense to me, I don’t think it is fair that you would have to wait in line behind other creditors if the landlord goes broke. Creditors take on a known risk by lending money or not being paid up front, a security deposit seems like a different sort of thing.

I don’t see that provision in the statute or in the attorney general’s explanation of landlord tenant law.

Beyond that, I’m not sure what it would mean for the landlord to hold the deposit “in escrow,” except in a trivial legal sense. Just about every state requires the landlord to return the deposit at the end of the lease. The money doesn’t belong to the landlord. Most states impose penalties for screwing around with the deposit. But a true escrow would be a third party. Some states require the landlord to deposit the money into a bank account and provide the tenant with details of the account. That’s closer to an escrow arrangement than Minnesota’s. Closer yet would be a requirement that the money be given to a disinterested third party with instructions to hand the money over to the tenant once certain conditions are met, and not to allow the landlord access to the money unless the landlord meets certain conditions.

But aren’t those usually civil penalties, not criminal? In my state, (NH), the tenant can sue the landlord for any irregularities with the deposit, and recover double the amount of the deposit if the court finds in his favor. But that still leaves the problem of collection from a party who the bank already had no luck collecting a much larger debt from. Not much satisfaction.


Yep. That’s pretty much the role of the Rental Bond Board in New South Wales, which i described in my first post. I think it’s a good system.

Here is a description of how it all works.

Here is a chart describing the basics of security deposit laws in every state:

This pdf has a chart that includes information on which states impose requirements (bank account, bond, escrow account, etc.) on security deposits: is for sale | HugeDomains I haven’t verified any of the information.

Yes. The website goes a little nuts in my browser, but the system looks good.

Having worked for three landlords (a 28-unit building and a 96-unit one that had two owners wihle I was there), I can assure you that plenty of Washington landlords aren’t following the law about keeping security deposits separate.

But to address the original question: it’s pretty easy to find reasons to keep a security deposit. If you’re desperate enough to be foreclosed on, you’ll have pointed out the scratch on the wall, the tiny burn mark on the carpet, the tenants’ failure to clean behind the stove and whatever else. If you’re the tenant, you probably didn’t pay much attention to the move-in inspection, didn’t take pictures of the original condition, and aren’t sure where “wear and tear” ends and damage begins.

In my state, landlords cannot just claim damage, they have to produce receipts for the repairs, and they must return the difference. I can sue them for double the deposit if they try to pull anything.

And in the case of a foreclosure, according to Gfactor’s post above, the former landlord cannot even deduct for damages, as they are no longer the owners of the damaged property. If the new owner (i.e. the bank) wishes to recover any damages, they’ll need to sue the tenant; the former owner no longer has any interest in the property and must return the deposit in full.

Between the mortgagee and landlord the matter of existing leases is often handled by a clause in the mortgage documents called and assignment of leases and rents. Here is an example:

But landlords can charge for labor based on an hourly rate. Did you remember to remove the faucet knobs to clean the soap scum from underneath? Did you patch over all your nail holes and repaint them? New paint and labor to put it up runs about $400 for a 900 sqft apartment. If we have to replace the carpet (which normally happens every 3-6 years), you’re already talking $900 to $2000. All we have to do is come up with a reason why the replacement is your fault and not part of wear and tear. There’s always some burn mark, bleach spot or stain we can find if we look.

Now, I don’t mean to imply that the places I worked for did anything unethical. We returned about 60% of the security deposits. But, having been in the business, I know that I could justify virtually anything I wanted to if it was my goal to keep a deposit.