Being sued for keeping security deposit.

35 Replies

Hello all, apologies if this question has been asked before but after searching through the forums for a while I found nothing to match my particular situation. 

We have recently sold our rental home to the renters. The day of closing, my agent calls me and explains to me that the buyers were asking for me to forgive their rent for the month so they could afford to close that day with their available funds. My response was I was fine with it only if I am not going to be held liable for any more money out of the deal. 

Long story short, we received our final statement from the escrow company and found that they deducted around $1,100 dollars from our profits. After seeing this, we opted to keep this amount from the renter's security deposit and returned the rest. After informing them of the reason, they are now threatening to sue us. So my questions are:

1) Do they have a case? The only thing they have going for them is the agent telling them they wouldn't have to pay rent. But nothing was ever mentioned about the security deposit. 

2) I live out of state (in Arizona), I would have to miss a few work days, pay for a plane ticket, hotel room and rental car just to defend myself in court. How are these situations normally handled? 

This feels like a complete scam, the agent I feel was working with the buyers to screw us out of the 22 days they owed for rent. Has anybody had any experiences like this? How did you handle it? Is it worth the fight? Normally I just give in to situations like this but this time it feels different. Appreciate any comments and feedback. Thanks!

Hi @Jacob Mendrin

This will be location specific so take my NorthEastern ways with a grain of salt.

The security deposit should go to the new owners of a rental property (of course unless agreements were made prior). You agreed to forgive 22 days of rent, then choose on your own to take it out of another location they should have been getting. Personally I think they may have a case. 

Like I said not a lawyer or even in your area, but I think you may lose this one. Now if you agreed to forgive the rent at closing but take it from the security deposit, you may have been OK. 

I am not an attorney and not providing legal advice. 

So basically the buyers/ tenants assumed their security deposit you’re holding would be returned. This is in addition to being forgiven last months rent? 

Correct? 

Check your property’s statues regarding tenant and landlord laws. Here, Kentucky Revised Statues is clear about use of a tenant’s security deposit—that it’s intended for property damages not rent, not late fees or for restitution not justice. 

Somebody instructed the title company to withhold those funds, right? Who authorized it? 

*no legal advice, no agency, no tax advice 

Account Closed

Obviously strictly for academic reasons at this point (Neither of us are there or his lawyer).

If the property passed from him to a new landlord what would happen to the security deposit there? Here it would go to the new landlord to cover damages (along with whatever interest was made on holding it).

So I see it as the new landlords (buyers) are given the funds to cover the damages the tenants (buyers) did to the property before end of lease. If they do not pass to the new landlord because there was no damage, they are passed back to the tenants for not causing damages.  

Either way they do not remain the property of a past landlord who has zero repairs to do to a property to return it to rentable condition. Minus wear and tear.

Originally posted by @Mike Cumbie :

@Will Bockoven

Obviously strictly for academic reasons at this point (Neither of us are there or his lawyer).

If the property passed from him to a new landlord what would happen to the security deposit there? Here it would go to the new landlord to cover damages (along with whatever interest was made on holding it).

So I see it as the new landlords (buyers) are given the funds to cover the damages the tenants (buyers) did to the property before end of lease. If they do not pass to the new landlord because there was no damage, they are passed back to the tenants for not causing damages.  

Either way they do not remain the property of a past landlord who has zero repairs to do to a property to return it to rentable condition. Minus wear and tear.

I see your point.

In this case the new owners are the previous tenants, right? 

So it’s no longer a custodial account with funds being held for damage, the new owners aren’t landlording to themselves. 

What has happened, if I understand this correctly, is that essentially the owner/seller has been bypassed without an opportunity to determine damages. 

However, that being said the property damages are irrelevant because the property will be conveyed to the new owners/ tenants upon closing. 

So if the owner has agreed to forgive the last month’s rent, then why is the security deposit relevant to the seller/landlord? 

You owe the security deposit to them, period. Doesn’t matter if you view it as the deposit going to the new owner’s or more appropriately, the deposit is being returned to the tenants because No damages were repaired out of that deposit.
We don’t know where the $1100 deduct came from and whether it was legit or not, I suspect it was just a closing cost you as the seller were unaware of but legit.
In any case, you don’t get to arbitrarily take it from the deposit, it is totally unrelated.
Also, you got a copy of the closing statement prior to closing and had to sign it.

Thanks guys for the responses, very insightful. 

I'd like to clarify a few things. Just for everyone's benefit and learning. 

1) The new owners of the home ARE the renters. While they were living in the property (under my ownership) they did not pay rent for 22 days.

2) Under California law, a security deposit CAN be used for defaults in payment of rent. 

3) The instructions I gave to my realtor were not fulfilled (he essentially didn't know what he was doing or outright lied). I stated that I would only forgive 22 days of rent as long as it did not come out of my profit of the house sale.

4) The amount that was deducted from my profits was essentially for the mortgage that was not paid, as well as interest and a late fee tacked on. The realtor stated this would not happen and has essentially gone into hiding. 

I'm viewing this more as realtor malpractice because who knows what he told them. It's either that or I've been taken, in that, to get a quick sale, he managed to convince them to not pay rent in order to save them some money. That may be far fetched but who knows. More comments are appreciated. Thanks. 

personally (not a lawyer) I think it comes down to how much was put in writing. If you put in writing you’d forgive last month rent then they may have a case. If it was all verbal then you can say the arrangement was last month rent in exchange for security deposit. 

You’ll have to check local laws and determine acceptable uses for security deposits. 

You agreed to the rent forgiveness, as you mentioned.  Sounds like your "extra deduction" was your your own mtg payment?  This has nothing to do with the buyer, or the agent for that matter.  The deposit is Not your money, it is clear you owe it to them.  Seems you want to blame everyone else for your own oversight.

Security deposits belong to the TENANT unless a legitimate claim is made under state law. Refer to your state laws to make sure YOU complied. BTW--22 days probably isn't worth getting sued for. When a new landlord takes over, the SD should be transferred to them regardless if they were previously the tenant. 

@Jacob Mendrin Thinking about a court date and how a judge will decide the "winner". Was this agreement in writing? If it's just he said she said, I would assume the ex tenant will win that case (aren't most western states more tenant friendly than midwest where I am?). For $1,100 I don't really see someone taking you to court for that. Maybe I'm wrong but I think most people that worried about $1k can't afford the lawyer and court fees to take this to court. 

But at the same time it sounds like returning the deposit could be in your best interest because you'll spend more on travel, lawyer, and court than just returning the $1,100. Sure if you won the case you could push for repayment of all your costs, but if they take you to court for $1,100 are they really going to have $1,500 to pay you back? I could see it if maybe they're wealthy and doing this just because they feel slighted and want to inconvenience you, but from what you have said, that does not sound like the case.

@Jacob Mendrin

The other thing to keep in mind is you are required within 21 days of the end of Tenancy to provide an itemized list of deductions. California also allows for treble damages. So damages plus up to 2X more. If you feel you are right (Personally I think you are wrong because you said "I'm fine with that" when asked if you would forgive the late rent) then you can fight it.

If you end up being wrong and a judge decides that you saying "I'm fine with that" is you forgiving the June rent. You then deciding to take the June rent out of the security deposit is you acting in "Bad faith" then a $3300 bill could come flying your way.

Good luck eitherway you decide to go with it.

@Jacob Mendrin 1st I would remind you that the 2 contracts are most likely separate agreements. It is possible to tie them together but generally are considered separate agreements under AZ real estate law.

The lease is the lease and in AZ the Landlord is responsible for accounting for the deposits and refunding any funds within 14 business days after lease expiration. The lease would have ended the day of closing. I have a form that details the deposits and any deductions that is sent via certified mail to the tenants so that it arrives in 14 business days or occasionally its hand delivered and signed for.

What you agreed to in the sale agreement seemed a bit more clouded as I'm not certain clarity was provided, was the rent waived or did you agree to something else. That seems to be the misunderstanding that should have potentially had more clarity.

You forgave the rent. Period. Has zero to do with the security deposit.

If you didn't forgive the rent then you could claim it against the security deposit. Why you didn't just work that out at the time of sale I have no idea.

I also have no idea why you would justify punishing the new buyers because you perceive your realtor wronged you.

"I'm viewing this a realtor malpractice..." and yet you are withholding an innocent parties deposit.

You are a piece of work.

Originally posted by @Patrick M. :

You forgave the rent. Period. Has zero to do with the security deposit.

If you didn't forgive the rent then you could claim it against the security deposit. Why you didn't just work that out at the time of sale I have no idea.

I also have no idea why you would justify punishing the new buyers because you perceive your realtor wronged you.

"I'm viewing this a realtor malpractice..." and yet you are withholding an innocent parties deposit.

You are a piece of work.

That seems to be the whole crux of the matter. My forgiveness of the rent had a contingency. That contingency was not met. What my realtor told me was not true. He even stated clearly there would be no late fee on my account; there turned out to be a late fee. In your experience, if a realtor misinforms you or out lies, what ways can you turn to protect yourself from something like this? 

PS. Nobody is trying to rip anybody off here, I have to say this whole situation turned ugly quickly and it seems I’m the one left holding the bag. 

Originally posted by @Doug McVinua :

@Jacob Mendrin 1st I would remind you that the 2 contracts are most likely separate agreements. It is possible to tie them together but generally are considered separate agreements under AZ real estate law.

The lease is the lease and in AZ the Landlord is responsible for accounting for the deposits and refunding any funds within 14 business days after lease expiration. The lease would have ended the day of closing. I have a form that details the deposits and any deductions that is sent via certified mail to the tenants so that it arrives in 14 business days or occasionally its hand delivered and signed for.

What you agreed to in the sale agreement seemed a bit more clouded as I'm not certain clarity was provided, was the rent waived or did you agree to something else. That seems to be the misunderstanding that should have potentially had more clarity.

Thanks Doug, the agreement was completely verbal and done through my realtor who I am not sure even expressed my true wishes to the buyers in the first place. My agreement to “waive the rent” had a contingency attached to it, and that contingency was “I did not want anymore money to come out of my pocket.” Of course, there’s no paper work confirming or denying any of this.

Originally posted by @Wayne Brooks :

You agreed to the rent forgiveness, as you mentioned.  Sounds like your "extra deduction" was your your own mtg payment?  This has nothing to do with the buyer, or the agent for that matter.  The deposit is Not your money, it is clear you owe it to them.  Seems you want to blame everyone else for your own oversight.

 1) My agreement to “rent forgiveness” had a “contingency” that was not conveyed to the buyers. The agent outright lied. 

2) My mortgage payment should have been covered by the prorated rent that the renters owed. The agent did not clarify any of this and never conveyed my wishes. So much so that I suspect they both were together in this. 

3) I believe I have a right to blame someone else for being lied to. Granted I should have demanded that my request be put into writing. After speaking with the escrow office they were shocked the agent did what he did and said it was definitely mishandled. 

If a Realtor is deemed to have conducted themselves in a less than desirable way a Complaint can be filed with the Association and or the AZ Department of Real Estate. 

The Real estate department would primarily take interest if the public was harmed via a law or rule being broken. From what I read I'm not sure this topic rises to that level.

Realtors agree to a Code of Ethics, a much broader perspective of items. You can breach the Code of Ethics and not break a law. Artice 1 is about treating parties fairly and honestly, sort of a catch-all.

What is the promise of "No Late fee"?

First things first. Make sure you get them their deposit back. Unless you want to go to court over it and potentially pay 3x the S.D. plus court fees and their lawyer fees (some of this depends on state laws). 

Then you can start the process of going after the realtor. Good luck with that. 

You agreed to waive the rent....with a contingency....that you never got in writing.......so essentially that contingency doesn't exist

The deposit belongs to the tenant for damages....yes you can use if for unpaid rent.....but you agreed to waive that rent (big mistake), so there is no unpaid rent..... or damages. Unless you want to lie now and say you never waived that rent and its unpaid late rent...better hope they don't have something in writing if you want to go that route

You reviewed the documents at closing..... and signed them....so you agreed to the terms. Was this deduction put in after those documents were signed? If not, you reviewed and signed....case closed. If there was an issue, you should have brought it up before you signed. Its your job to know the $$ you are expecting and be sure the documents reflect that.....or don't sign them until the discrepancy is cleared up....once you sign it's a done deal

You have zero case with the tenants......all you can do is raise hell with the real estate agent.... that's your only hope. If you are lucky they will take the $$ out of their commission to end this

If you have ZERO of this in writing, you will lose no matter what

Originally posted by @Ned J. :

You agreed to waive the rent....with a contingency....that you never got in writing.......so essentially that contingency doesn't exist

The deposit belongs to the tenant for damages....yes you can use if for unpaid rent.....but you agreed to waive that rent (big mistake), so there is no unpaid rent..... or damages. Unless you want to lie now and say you never waived that rent and its unpaid late rent...better hope they don't have something in writing if you want to go that route

You reviewed the documents at closing..... and signed them....so you agreed to the terms. Was this deduction put in after those documents were signed? If not, you reviewed and signed....case closed. If there was an issue, you should have brought it up before you signed. Its your job to know the $$ you are expecting and be sure the documents reflect that.....or don't sign them until the discrepancy is cleared up....once you sign it's a done deal

You have zero case with the tenants......all you can do is raise hell with the real estate agent.... that's your only hope. If you are lucky they will take the $$ out of their commission to end this

If you have ZERO of this in writing, you will lose no matter what

Thanks Ned, very helpful. The deduction did come out after I signed. This was all done after the fact. The first time I seen it was on my final closing statement sent to me with the check. Regardless I’m now in the position to return the complete deposit and go after the realtor. Not much I can really do though after reading other people’s opinions. This leads me to another question:

If a realtor can lie to you and not really face any real sort of repercussions (because it’s all verbal no proof of anything) then why even have one? I mean I’m sure I would’ve spent less then 10k in consulting a lawyer on all of my legal questions and just managing the sale myself. Ultimately the responsibility is solely on the seller so why trust a potential dirty agent (not saying all are like this) to handle it for me... 

Originally posted by @Doug McVinua :

If a Realtor is deemed to have conducted themselves in a less than desirable way a Complaint can be filed with the Association and or the AZ Department of Real Estate. 

The Real estate department would primarily take interest if the public was harmed via a law or rule being broken. From what I read I'm not sure this topic rises to that level.

Realtors agree to a Code of Ethics, a much broader perspective of items. You can breach the Code of Ethics and not break a law. Artice 1 is about treating parties fairly and honestly, sort of a catch-all.

What is the promise of "No Late fee"?

Because I was under the assumption the prorated mortgage that we owed on the home did not need to be paid (the realtor’s exact words were “don’t make the payment”) I just let the closing process take its course. So because I was late on the house payment I was charged a late fee plus interest. 

The agent stated clearly to me the following:

“Don’t make your house payment. You won’t have to pay it anyway.”

“Forgive their rent.”

Both sides will be happy. 

Turns out that was not the case. 

So the $1100 was not their rent, it was you not paying the mortgage for June?

Then you forgave the June rent from the tenant

Then you tried to take the $1100 out of their security deposit for your mortgage payment?