Security Deposit Pitfalls for Developers and Landlords in Ohio

Security Deposit Pitfalls for Developers and Landlords in Ohio

When drafting form leases and security deposit policies for residential rental properties*, developers should be aware of Ohio Revised Code Section 5321.16 titled “Procedures for Security Deposits”.  R.C. 5321.16(A) requires that “[a]ny security deposit in excess of fifty dollars or one month's periodic rent, whichever is greater, shall bear interest on the excess at the rate of five per cent per annum if the tenant remains in possession of the premises for six months or more, and shall be computed and paid annually by the landlord to the tenant.”  In other words, any portion of the security deposit in excess of one month’s rent must bear interest at 5%, and must be paid annually to the tenant during the lease term.  In many cases, landlords prefer to charge first and last month’s rent as a security deposit.  Compliance with the statute in a large complex could add up.  To avoid the operation of this section, simply keep security deposits equal to one month’s rent.

More importantly, developers and landlords should enact polices to ensure strict compliance with R.C. 5321.16(B) which sets out the procedure for returning a security deposit to a tenant in Ohio.  If a landlord fails to comply with 5321.16(B) it will be liable for double the amount of the security deposit ‘wrongfully’ withheld, along with attorney fees. In practice, this amounts to strict liability for the landlord as the word ‘wrongfully’ tends to be ignored by courts.  Even if a landlord complies with the letter of the law and returns the balance of a security deposit along with an itemization of damages, a tenant could still bring suit if it believes that any portion of the security deposit was withheld for damages that were not in excess of ordinary wear and tear.  For example, if a landlord returns $500 of a $1000 security deposit along with a good faith itemization of $500 worth of damages caused to the premises, and the tenant is able to prove in court that $250 worth of the amount withheld was not attributable to damages in excess of reasonable wear and tear, then, by statute, the court must award double that amount to the tenant. The court might also award attorney fees.  (Arguably, attorney fees must be awarded automatically to the tenant according to the statute, but in practice this does not always occur.)  This could also result if a landlord is unable to prove the damages that a tenant caused to the premises by the time a tenant brings a lawsuit.

In the event any portion of a security deposit is to be withheld, it is advisable to photograph the damages and save any receipts for work to correct the damage. Otherwise, even if legitimate, a landlord may not be able to prove that the amount withheld from the deposit was justified and face the penalties imposed by the statute.

*Note: Chapter 5321 only applies to residential leases, not leases for commercial property.

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