Security Deposit Owed if Never Received?

9 Replies

Hi all,

This is a strange situation that I'm hoping someone can give me a sanity check on:

I purchased a home last year from a well-known company in Chicago that was forced to close earlier this year. The home was occupied at the time by a tenant and the property manager had collected the tenant's security deposit before I closed on the home a month later. 

Now the tenant is now moving out and asking for the security deposit back. Unfortunately, the deposit funds were never transferred to me because the management company was forced to close (they also owe me thousands in collected rent that I don't expect to see). 

I'm guessing I owe this deposit, even though I never received it. I'm discussing options with my new property management company's lawyer, but wanted to crowd-source some opinions from more experienced landlords as well. What would you do in this situation?

Assuming the tenants deposit was documented in the lease, you are now responsible for refunding the money. In purchasing the property, you assumed the lease.

Usually the original owner will transfer you the deposits during escrow. But that doesn't always happen. Sometimes these things are overlooked. Sometimes buyers purchase a distressed situation at a good deal and consider it a transactional cost. Whatever the case may be, it is now your responsibility.

@Chris Paul - like Eric said, you are still responsible for the deposit, and in  if it is in Chicago I would make sure to pay it back with interest within the 45 days required.  We have strict laws here regarding SD's

You bought the property, you bought the problems. If your current Property Manager is sending you to an attorney to determine your responsibility then it may be time to look for a new Property Manager.

Yes, @Chris Paul , to echo @Brie Schmidt , the Chicago security deposit ordinance is strict liability.  And section 5-02-080(e) of the Chicago Residential Landlord Tenant Ordinance (also known as the RLTO), states that 

"...the successor landlord of such property shall be liable to that tenant for any security deposit, including statutory interest, or prepaid rent which the tenant has paid to the transferor."  

However, if the tenant sues for any violation of the RLTO, section (e) goes on to state that the "well-known company" remains:

"jointly and severally liable with the successor landlord to the tenant for such security deposit or prepaid rent, unless and until such transferor transfers said security deposit or prepaid rent to the successor landlord and provides notice, in writing, to the tenant of such transfer of said security deposit or prepaid rent, specifying the name, business address and business telephone number of the successor landlord or his agent within ten days of said transfer."

I suspect the above notice was never provided, meaning the tenant may sue you and the well known company as a co-defendant for the return of the deposit, or you may have a third party complaint against the well known company, if the well known company is not named as a defendant in the initial lawsuit.  (Collecting and/or suing a dissolved company or its successor is another topic all together.)

File to collect rent owed, small claims court, and offer to drop claim in exchange for not returning deposit.

If he refuses return his deposit and take him to court.

Thank you to everyone who chimed in, this has been SUPER helpful.

I've been able to negotiate returning half of the deposit with the tenant so I am going to bite the bullet and pay that out of my own pocket.

Going forward, I'll remember this as a lesson to make sure this is covered (I'll definitely be buying more properties in the future).

Thanks again!

@Chris Paul   I don't think you can do that. You owe the entire security deposit. Now, if there were damages during the time of their tenancy you can deduct those charges.

You owe the tenant.

The old company owes you.

Good luck!

@Chris Paul Not sure if you negotiated with the tenant to pay half the deposit or if you're saying the PM is going to pay the other half, but I would strongly encourage you to ensure the tenant is paid back all of their security deposit PLUS interest within 45 days. The Chicago laws are not only tenant-friendly, but black and white which doesn't allow for a judge to use common sense. So if this went to court and you lost (which you would based on the info provided) you will have to pay a hefty penalty, plus the resident's attorney costs and court costs.  

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