A landlord often assesses a security deposit as a financial insurance policy in the event that the tenant damages the premises or fails to pay rent. However, any mishandling of the security deposit can lead to severe civil penalties for the landlord.
MCL 554.601(e) defines "security deposit" as "a deposit, in any amount, paid by the tenant to the landlord or his or her agent to be held for the term of the rental agreement, or any part of the term, and includes any required prepayment of rent other than the first full rental period of the lease agreement; any sum required to be paid as rent in any rental period in excess of the average rent for the term; and any other amount of money or property returnable to the tenant on condition of return of the rental unit by the tenant in condition as required by the rental agreement. Security deposit does not include either of the following:"
- "(i) An amount paid for an option to purchase, pursuant to a lease with option to purchase, unless it is shown the intent was to evade this act."
- "(ii) An amount paid as a subscription for or purchase of a membership in a cooperative housing association incorporated under the laws of this state. As used in this subparagraph, "cooperative housing association" means a consumer cooperative that provides dwelling units to its members."
- It should be noted that the Michigan Court of Appeals ruled in Stutelberg v Practical Mgt, 70 Mich App 325; 245 NW2d 737 (1976) that a non-refundable cleaning fee is not a security deposit (the lease made it very clear that it was a separately contracted service).
The following is an overview of Public Act 348 of 1972 governing the law regarding security deposits:
- AMOUNT: The security deposit cannot exceed a one and a half month's rent (e.g. if monthly rent is $1,000.00, the security deposit cannot exceed $1,500.00). MCL 554.602.
- NOTICE: The landlord cannot require a security deposit unless he or she notifies the tenant no later than 14 days of taking possession of the premises of ALL THE FOLLOWING IN WRITING: (MCL 554.603).
- Landlord's name
- Landlord's address for receipt of communications
- Name and address of financial institution holding the security deposit
- The following notice in 12 point boldface type: "You must notify your landlord in writing within 4 days after you move of a forwarding address where you can be reached and where you will receive mail; otherwise your landlord shall be relieved of sending you an itemized list of damages and the penalties adherent to that failure."
- DEPOSIT: The landlord has two options for depositing the tenant's security deposit.
- The landlord can put the security deposit in an escrow account in a regulated bank or financial institution. MCL 554.604(1).
- The landlord can post a cash bond or surety bond for the full amount of the security deposit, after which he or she can use the money as his or her own. MCL 554.604(2).
- OWNERSHIP: The security deposit is the property of the tenant until the landlord establishes the right to use the funds after posting a cash bond or surety bond for the full amount. MCL 554.605.
- INABILITY TO WAIVE REQUIREMENTS: The requirements of Public Act 348 of 1972 cannot be waived by the parties to a rental agreement. MCL 554.606.
- PERMISSIBLE USES: The landlord can only use a security deposit for the following purposes:
- "Reimburse the landlord for actual damages to the rental unit or any ancillary facility that are the direct result of conduct not reasonably expected in the normal course of habitation of a dwelling." MCL 554.607(a).
- "Pay the landlord for all rent in arrearage under the rental agreement, rent due for premature termination of the rental agreement by the tenant and for utility bills not paid by the tenant." MCL 554.607(b).
- INVENTORY CHECKLISTS: The landlord SHALL make use of inventory checklists and the beginning and ending of the tenancy for each rental unit for which a security deposit is required.
- "The landlord shall make use of inventory checklists both at the commencement and termination of occupancy for each rental unit which detail the condition of the rental unit for which a security deposit is required." MCL 554.608(2).
- "Unless the landlord and tenant agree to complete their inventory checklist within a shorter period, the tenant shall review the checklist, note the condition of the property and return 1 copy of the checklist to the landlord within 7 days after receiving possession of the premises." MCL 554.608(3).
- 'The checklist shall contain the following notice in 12 point boldface type at the top of the first page: " You should complete this checklist, noting the condition of the rental property, and return it to the landlord within 7 days after obtaining possession of the rental unit. You are also entitled to request and receive a copy of the last termination inventory checklist which shows what claims were chargeable to the last prior tenants.".' MCL 554.608(4).
- "At the termination of the occupancy, the landlord shall complete a termination inventory checklist listing all the damages he claims were caused by the tenant." MCL 554.608(5).
- NOTICE OF DAMAGES: In the event that there is damage to the rental unit and the landlord wishes to apply the security deposit against it, he or she must do all of the following according to MCL 554.609 and MCL 554.610.
- The landlord shall mail to the tenant, within 30 days of the end of the tenancy, an itemized list of damages claimed for which the security deposit might be used, included the estimated cost of repair and the amounts he or she intends to assess against the tenant.
- The list shall be accompanied by a check or money order for the difference between the damages claimed and the amount of the security deposit held by the landlord.
- The notice of damages shall include the following statement in 12 point boldface type which shall be at least 4 points larger than the body of the notice: " You must respond to this notice by mail within 7 days after receipt of same, otherwise you will forfeit the amount claimed for damages.".
- Failure to comply with the notice of damages requirement within 30 days of the end of the tenancy constitutes an agreement by the landlord that NO DAMAGES ARE DUE and the security deposit should be returned to the tenant immediately.
- ACTION FOR DAMAGES: The tenant has 7 days to respond to the landlord's notice for damages, indicating if he or she agrees with or contests the amount of the security deposit being requested to be withheld. MCL 554.612. If there is no agreement, the landlord must file suit in district court within 45 days of the end of the tenancy for the damages he has claimed OR ELSE return the balance of the security deposit to the tenant. MCL 554.613. A landlord shall not be entitled to retain any portion of a security deposit for damages claimed UNLESS:
- He or she has first obtained a money judgment for the disputed amount or filed with the court satisfactory proof of an inability to obtain service on the tenant;
- The tenant has failed to provide a forwarding address;
- The tenant has failed to respond to the notice of damages;
- The parties reached an agreement in writing regarding the disposition of the security deposit, or;
- The amount claimed is entirely based upon accrued and unpaid rent equal to the actual rent for any full rental period or portion thereof during which the tenant has had actual or constructive possession of the premises.
- TERMINATION OF LANDLORD'S INTEREST: According to MCL 554.614, if the landlord's interest in a rental unit terminates by sale, death or otherwise, the landlord remains LIABLE with respect to the security deposit UNLESS:
- The security deposit is transferred to the successor in interest AND the tenant is notified in writing by ordinary mail of the name of the successor in interest and of the transfer, or;
- The security deposit is returned to the tenant.
FAILURE OF THE LANDLORD TO COMPLY WITH THIS ACT CONSTITUTES WAIVER OF ALL CLAIMED DAMAGES AND MAKES HIM OR HER LIABLE TO THE TENANT FOR DOUBLE THE AMOUNT OF THE SECURITY DEPOSIT RETAINED.
If you are a landlord or tenant with a legal issue regarding security deposits or any other aspect of your tenancy, do not hesitate to contact the attorneys at Kershaw, Vititoe & Jedinak for assistance today.