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Who Holds the Security Deposit?

This post is an excerpt from the Denise Evans book, Alabama Landlord’s Desk Reference and Forms Book.
If you’d like more information, including free table of contents and index, there is a link at the end of the article.

Sometimes a landlord hires a property management company, but wants to hold all security deposits itself. Often, the property manager balks, and says that is not allowed. The answer is more complicated.

A property manager is the agent for the landlord/property owner. Unless the management contract has some different provision, then the manager must surrender the security deposit to the owner if it is demanded. Agents must comply with their principal’s instructions, unless those instructions are illegal or a contract between the parties dictates a different result. There is nothing illegal about the owner holding the security deposit money.

This typically comes up in three situations:

  1. Owner wants the deposit forfeited and manager disagrees.  Unless the management contract says the manager is the one who is allowed to make that decision, then the manager must declare the deposit forfeited. If that happens, ask the owner to sign an indemnification agreement saying that if the manager is sued because the deposit was not refunded, then the owner will pay all of the manager’s legal fees and other costs and expenses.
  2. Owner wants to change management companies, or self-manage. It does not want to declare the deposit forfeited, but it does want sole control over the money.  This has the same answer as #1 above.
  3. Owner wants the security deposit so it can use the money. It is allowed to do that in Alabama, but the funds must be available and refunded at lease end if there have been no deductions.  Obtain the same indemnity agreement as described in #1 above.

Property managers who want to avoid such situations should have a contract clause that says security deposits will be held only by the manager, that forfeiture decisions are in the sole discretion and control of manager, and that if there is a change in management companies the manager will refund security deposit by checks made jointly payable to the tenant and the new management company. That last item avoids the problem of the new management company failing to refund the deposit (but with no forfeiture-related reason) and the tenant is allowed to get the refund from the former company, under Alabama law. With my method, the tenant has ALREADY received the refund, even though jointly payable to the new management company.

Interested in the Landlord’s Desk Reference and Forms Book? Click HERE

What do you think?