When Does the Landlord’s Duty to Refund a Security Deposit Start to Run?

Security deposits remain a bone of contention in commercial leasing litigation, particularly now that COVID-19 eviction restrictions have been lifted. Typically, the obligation to return the security deposit begins when the tenant surrenders the premises. The following scenario, which is based on an actual case, illustrates some of the issues that may arise in determining whether a surrender has occurred.

SITUATION

April 15: A tenant signs a five-year lease and makes a $9,000 security deposit payment on a vacant office building for use as a daycare center.

May 1: The tenant moves into the building and smells something funny.

May 22: After performing tests, an environmental consultant confirms that the building contains mold and that the problem is extensive, with mold in the HVAC, walls, ceilings, and carpets on multiple floors.

July 1: The tenant tells the landlord that she’s rescinding the lease and surrendering the building back. The landlord responds by offering to let her out of the lease if she either pays the first six months’ rent or forfeits the security deposit. The tenant rejects both options.

July 26: The tenant asks the landlord to perform a second environmental assessment, which confirms that the building has an extensive mold problem.

August 16: The tenant again tells the landlord she’s rescinding the lease, demands her security deposit back and provides her forwarding address.

August 17 and September: The landlord keeps the security deposit and leases the now vacated building to another tenant.

October: The tenant sues the landlord for, among other things, refusing to return the security deposit and provide an accounting; the landlord countersues the tenant for breaching the lease.

THE LAW

Under Texas law, commercial landlords must refund a tenant’s security deposit and provide a written accounting of any deductions within 60 days after the date the tenant: (1) surrenders the premises; and (2) provides the landlord or its agent notice of its forwarding address. Security deposit laws are similar in other states.

QUESTION

Was the landlord’s failure to return the tenant’s security deposit unlawful?

A.            Yes, because it didn’t return the money within 60 days after surrender

B.            No, because there was no mutual written agreement of surrender

C.            Yes, because the mold made the building unsuitable for use as a daycare center  

D.            No, because the tenant’s request for a second inspection after purportedly rescinding the lease shows that she didn’t surrender the premises

ANSWER

A. The landlord did violate the law by not returning the tenant’s security deposit within 60 days after surrender.

EXPLANATION

This scenario, which is based on an actual Texas case called Casselsco, Inc. v. Alvi (2021 Tex. App. LEXIS 6194, 2021 WL 3356849), illustrates the rules governing when the landlord’s obligation to repay a security deposit is triggered. While repayment deadlines vary by state, the clock typically begins to tick when the tenant surrenders the premises the way it does in Texas. The key question in this case is whether the tenant did, in fact, surrender possession.

The dynamic: If the tenant shows that the landlord didn’t refund the security deposit or provide a written accounting within 60 days after surrender, the landlord is presumed to have acted in bad faith. The burden then shifts to the landlord to rebut the presumption.

What’s normally a fairly straightforward inquiry is tricky in this case because the tenant sent mixed signals. Three weeks after notifying the landlord that she was rescinding the lease and surrendering the property, she asked the landlord to perform a second environmental assessment on the building. The landlord argued that this action refuted the tenant’s claim of surrender.

The court said that it would have been “inclined to agree” with the landlord, at least enough to rule out summary judgment in the tenant’s favor, had this been the only evidence on the question. However, there was even stronger evidence showing that the tenant did surrender and that the landlord accepted that surrender—namely, the fact that the landlord took possession of the building and then relet it to another tenant. Such action was “substantial enough to show a re-appropriation of the premises and an intent to foreclose any future rights of the tenant in the premises,” the court concluded.

Bottom line: The tenant did surrender the premises and it was illegal for the landlord not to return the security deposit or provide a written accounting within 60 days. So, A is the right answer.

WHY WRONG ANSWERS ARE WRONG

B is wrong because there doesn’t have to be a mutual written agreement for a surrender to occur. Surrender can also be effected by operation of law without a writing, such as where a tenant abandons the premises and the landlord re-enters. And that’s what happened in this case.

C is wrong because while it’s tangentially related, the mold issue speaks more to the tenant’s right to rescind the lease than the landlord’s obligation to return the security deposit after the tenant surrenders the premises.

D is wrong because, while the tenant’s request for another environmental audit does cast some doubt on whether she really surrendered the premises, all such doubt was erased by the landlord’s subsequent actions in re-taking possession and leasing the building to another tenant