The Landlord’s Liability: Security Deposits
The Chicagoland rental market continues to thrive and new players are entering the multi-family game every day, either by acquiring rental properties from banks through foreclosure or taking advantage of the low interest rates. One thing for new buyers and investors in residential rental property to keep in mind: Be especially careful when purchasing properties and assuming residential leases that include security deposits.
Since 2010, the provisions of the Chicago Residential Landlord Tenant Ordinance (RLTO) provide for successor landlord liability for security deposits and impose strict administrative and procedural requirements on landlords holding them. This includes foreclosure properties where security deposits are actually transferred to the buyer.
The damages associated with a violation of the security deposits provisions of the RLTO can result in a judgment against a landlord equal to two times the security deposit plus interest, court costs and reasonable attorney’s fees. In light of this, many landlords elect to forego security deposits in favor of non-refundable “move-in” fees or prepaid rent.
The RLTO also provides for successor landlord liability to a tenant in the event of a sale, lease, transfer or ownership or control, or other direct or indirect disposition of residential property. In the event of a sale of residential real estate property to a buyer, the RLTO specifically provides that a successor landlord “shall be liable to a tenant for any security deposit, including statutory interest, or prepaid rent which the tenant paid to the transferor.”
As it relates to statutory interest, any landlord holding a security deposit or prepaid rent for more than six months is required to pay interest to the tenant accruing from the start date of the lease term. It must be paid to a tenant each year during the term within 30 days after the end of each 12-month period or the interest deducted from future rent due. Failure to pay the statutory interest to a tenant each year can result in damages of two times the security deposit plus interest and court costs, and the landlord is also responsible for paying the tenant’s reasonable attorney’s fees.
Buyers and owners of multi-family rental properties should routinely review the RLTO to make sure they are in compliance at all times to avoid strict liability. Illinois courts have ruled that any violation by a landlord failing to pay the statutory interest need not be willful. In Lawrence v. Regent Realty Group, the court ruled that proof that the landlord’s failure to pay interest on a security deposit was willful was not required. Double the amount of the security deposit under the RLTO was awarded to the tenant.
While the Chicago RLTO is showcased here, there may be similar ordinances governing landlord-tenant relationships in other jurisdictions. It is incumbent on buyers, investors and owners to do their due diligence and seek competent counsel for guidance to avoid liability when acquiring multi-family properties.