How to be a Landlord in North Carolina (Part II)

Kerri SiglerFormer Partner at Wait Law, P.L.L.C.

BEFORE YOU READ: Many landlord/tenant issues can be resolved through a properly drafted lease agreement. Call today for a quote, and let us know if the information below is useful to you.

 

PART II: WHAT TO DO WITH TENANT SECURITY DEPOSITS

There you are, a decent landlord. Your tenant bails on you owing a months’ rent and leaving you about $250 in damage. You have no idea where they went. No worries, right? You have two months’ rent in a separate savings account, so you’ll just empty that to pay yourself back for the months’ rent and damage. The remaining money you’ll keep in the savings account awhile and if the tenant asks for it back, fine. If not, you keep it.

All good, right? Wrong! When it comes to security deposits, the golden rule is simple: DON’T TOUCH IT.

Even though the above hypothetical makes perfect sense to reasonable people, reasonable people did not write the laws. Politicians wrote the laws. Ergo, they’re counterintuitive and make little sense to the uninitiated. To spare you the agony of violating about 3 different laws by living out the above scenario, as a great many well-meaning landlords do, here are some basic rules:

 

1. How much can a security deposit be?

In North Carolina, the permissible amount of a security deposit depends on the length of the tenancy.

Week-to-week tenancies may charge two weeks’ rent for a security deposit.

Month-to-month tenancies may charge 1.5 months’ rent for a security deposit.

Yearly tenancies may charge 2 months’ rent for a security deposit.

You can find this information in NC General Statute section 42-51(b).

 

2. Where must the security deposit be kept?

Security deposits must be held in a trust account. A savings account will not do. Under the mattress, in a jar, buried out back? Nope, those are out, too. Trust accounts exist to hold money for very specific purposes – like security deposits – whereas regular bank accounts hold money to be used for any purpose. The law requires that security deposits be held in trust accounts because that money (a) belongs to the tenant unless/until the landlord properly accounts for reasons why it then belongs to him; and (b) because a landlord may only use a security deposit for specific purposes (see below).

Furthermore, you must tell the tenant the name and address of the bank or institution holding the security deposit within 30 days from the start of the lease. Since you may need to prove that you told them later, putting such notices in writing, keeping a copy, and getting proof that you sent it and they received it are good ideas, even if not technically required by law.

A bank can help you set up a trust account and answer questions about accounting for the money going in/out for each tenant. It’s a lot of work, but the consequences of failing to do so are potentially much, much worse than that extra hour it takes to get it right.

You can find this information in NC General Statute section 42-50.

 

3. When and how can a landlord use a security deposit?

Security deposits belong to the tenant. That’s important to remember. Just because the landlord possesses it, doesn’t mean the landlord has the unfettered right to use it. Because landlords are holding onto money that does not yet belong to them, the law only allows that money – or portions of it – to belong to the landlord under certain specific circumstances and for certain specific reasons. Once a tenant leaves – either because they abandoned the property, the lease ended, or they were evicted – the landlord must take certain steps before he is allowed to use any portion of the security deposit.

FIRST, the law requires landlords to itemize the damage and create an accounting. Once you, the landlord, receive possession of the premises either from the court or because the lease term ended and the tenant moved out, the law requires you to list in writing all the legally-permissible costs you plan to deduct from the security deposit before you actually deduct them. This is called an accounting. Landlords may only charge for their actual costs. Nuisance value doesn’t count. An attorney can help you create an accounting or answer questions about how if you’re having trouble.

SECOND, the law requires landlords to send a copy of the itemized list to the tenant within THIRTY (30) DAYS. If, for whatever reason, you are incapable of itemizing the damages within 30 days, then you must send an interim accounting – an accounting of what you do know within 30 days – with a statement that more time is needed to complete it. Sending an interim accounting gets you an extra 30 days, but the total time you get to complete the accounting is sixty (60) days from the day you get possession. Two months.

You MUST provide a WRITTEN accounting – or at least attempt to do so – before you may touch any portion of a security deposit. These requirements can be found in NC General Statute section 42-52.

LAST, once a landlord provides the accounting, the landlord may apply the security deposit towards the following uses only:

1. Non-payment of rent;

2. Non-payment of water, sewer, and/or electric services (utilities);

3. Damage to the premises including smoke/carbon dioxide alarms, but excluding normal wear & tear;

4. Damages resulting from breaching the lease;

5. Liens levied against the premises due to the tenant’s unpaid bills;

6. The costs to re-rent the premises if the tenant breaches the lease;

7. The cost to remove and store the tenant’s abandoned property after summary ejectment;

8. Court costs (e.g. for summary ejectment);

9. Late fees, and other fees listed in  NC General Statute section 42-46.

NOTE: The law does NOT allow landlords to deduct for normal wear and tear. These permitted uses can be found in NC General Statute section 42-51(a).  The landlord has 30 days to deliver the accounting along with the remainder of the security deposit, if any, to the tenant unless they provided an interim accounting, in which case the landlord has 60 total days from receiving possession to provide the final accounting and the remainder of the security deposit, if any.

 

4. What if I do not know where the tenant lives now?

Even if you don’t know where a tenant went, and never received their new address, there are still rules to follow for handling a security deposit. The law still requires landlords to create an accounting of legally-permissible deductions from the security deposit. The law further requires landlords to wait 30 days before deducting any amounts for legally-permissible costs from the security deposit. Any remainder after deductions must be held in trust by the landlord for 6 months before being deemed abandoned. The rule is a little fuzzy on whether a landlord must send the required itemization to the tenant’s last known address (even if it’s the address of the rental property itself) in cases where a new address is unknown. Since mail could be forwarded to a new but unknown-to-the-landlord address, the safest practice is to go ahead and send the itemization.

These rules can be found in NC General Statute section 42-52.

 

5. What if I don’t do any of the foregoing?

Failure to provide a timely accounting, apply the security deposit appropriately, and/or return the balance can result in a landlord’s forfeiting his right to keep any portion of the security deposit for any reason. It may also result in a civil action against him by the former tenant and being forced to pay a tenant’s damages. Willful failure to do so can additionally result in the landlord paying attorney’s fees. Truly willful behavior may also, in some cases, also violate NC General Statute Ch. 75, the Unfair and Deceptive Trade Practices Act. If a landlord violates this Act, he will be hit with 3x the total damages plus attorney’s fees.

These consequences are found in  NC General Statute section 42-55.

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