Penny wise and pound foolish.
Google this phrase. It “describes the act of concentrating so hard on economizing in small matters that one misses the opportunity to save or gain a large amount of money in large matters”. This adage remains timely to Landlords when preparing a Final Accounting Statement for a recently vacated Tenant. It might be worth amending this phrase to include “…or to protect oneself from paying large sums of money in an effort of trying to recoup a much smaller amount”.
I have been told by Landlord attorneys that Security Deposit disputes represent the single biggest issues litigated. They also say that counseling the Landlord over perceived damages owed is the most trying part of these cases. Owners are often angry and feel entitled to seek redress for every flaw they find at the premises that was not there before the ex-Tenant moved in.
We need to understand local and statewide Security Deposit ordinances. It helps in managing expectations and can be important for protecting an Owner’s financial wellbeing. Owners should recognize that Tenants’ lawyers see Deposit disputes as “low hanging fruit”. They are often able to win damages for their clients and themselves. Landlords should factor that risk for a better perspective in determining what constitutes damage, and whether it is worth pursuing the claim.
If you are a smaller Landlord and don’t have regular monthly vacancies to process, you are an ideal candidate for making costly mistakes. While this may be your first vacancy in a few years, lawyers and judges review them daily. They know all the mistakes and all the ways these suits are won and lost. Penalties can be incurred simply by an improper notice or improper accounting, so the matter may never even go to trial yet still sting your wallet.
In court, the two biggest reasons a Landlord prevails are: 1) The Tenant does not show up – thus forfeiting the case, or 2) The Tenant shows up without a lawyer while the Landlord has one in court. If the Landlord prevails, they will need to write a check to the lawyer first, and then pursue the ex-Tenant for payment. When a Tenant shows up with an attorney, it often means the Landlord can fast forward and simply pull out their checkbook.
Whether or not this makes sense or is fair is not the issue.
Oregon regulations have evolved over the last few years on recovery of damages under ORS 90.300. The City of Portland adopted PCC 30.01.087 in 2019 – as part of its F.A.I.R. Ordinance, (Fair Access In Rentals). Oregon rules may offer a better balance of fair restitution, but they’re not a slam dunk. Portland’s rules are arduous and punitive and written to not only benefit the Tenant, but to penalize the Landlord. They have taken away almost all reason for a Landlord to charge a Security Deposit, let alone to try and collect on damages. There are provisions of liability even when a deposit is fully refunded!
Some State legislators are pushing to adopt these types of provisions across Oregon. Regardless, sitting judges in counties throughout the Metro Region routinely rule for Tenants in their courtrooms. Often cases morph at trial from “who damaged what” to “how the Landlord retaliated for unresponsive repair requests and/or violated habitability statutes by allowing this or other problems to surface and persist during the tenancy”. These are commonplace tactics employed routinely and they can win cases for the Tenants.
Trying to win a verdict in Security Deposit dispute is a lot like making a bet. And even if the Landlord succeeds, to get paid on that bet often means using collections or going to small claims court. On the other hand, losing a verdict may mean paying “actual damages” plus penalties per violation that can quickly total tens of thousands of dollars. Activist lawyers exploit the wording of the ordinances to seek individual penalties for each individual instance that they can show when a specific regulation is violated. This tactic is known as “stacking” a case verdict and it is a true threat.
As one Landlord’s attorney put it, when asked about having a policy to charge a standard Security Deposit: “If you had the chance to make an investment in anything in your life for $1,500 (the amount of the Security Deposit) while accepting the known risk of possibly losing $15,000 or more, (the amount of a judgement lost) would you do it?” Of course not.
In olden times (20 years ago) Landlords did not collect Security Deposits. Instead, they charged first and last month’s rent. This is still true today for many large apartment complexes. In a softer rental market when supply outpaces demand, incentives like free month’s rent and waiver of Security Deposits are also commonplace.
These policies have traditionally been made with economic justifications based on market conditions; not legal decisions based on risk management.
As our market has grown in recent years many Landlords have taken advantage of Oregon’s law which has no cap on the amount of Security Deposit that can be charged. The result has required many Tenants end up paying thousands of dollars in Deposits at the time of their occupancy. The unspoken truth in court disputes is that when a lot of money is on the line (and especially when the Tenant has the financial resources to defend themselves), the more difficult it is to collect, even when a claim for damages may have merit.
Tenants are not legally obligated to return the unit in its “rent ready” condition. Even basic cleaning is not a sure bet for which to seek compensation. Landlords realize that vacancies cost money to fill. Not only in lost rent, but in updating to some degree the unit’s condition, whether it is a quick patch and paint or new carpet, or a full blown “turnover” of fixtures and appliances, etc. Judges realize this too and are reluctant to put the burden wholly back on the Tenants. The common street lore is that the Landlord is “getting rich” by having real estate assets. This is a widespread perception, true or not. And it is very frustrating.
So if withholding money from a Tenant’s Security Deposit for damages is either difficult or impossible (depending on the case), is there any other reason to charge it?
Yes. It is important for Landlords to have validation that a prospective Tenant will have some “skin in the game”; that they will make a willful attempt to honor the conditions of the Rental Agreement. A Deposit for Last Month’s rent satisfies this concern. It cannot be used for property damages or for anything other than rent owed. However, it helps define a smooth termination of tenancy. And the Landlord can still pursue a Tenant for damages by means of collections and/or small claims court This is an available tool for Landlords to use in order to recoup money for actual damages done with or without Security Deposits.
One of the biggest fear Landlords have is that a bad Tenant ends up trashing the property. It’s rare but it does happen. When it does there is never enough Security Deposit to cover the remediation. Actually, almost anytime that any serious damage occurs the Security Deposit is not enough to cover the costs of repairs.
Reviewing the conditions of the Greater Portland Metro Area market in 2021, the time has come to re-adopt that practice of charging a Last Month’s Rent and eliminate Security Deposits as a risky and non-useful financial placebo.
Another possibility In the meantime, are insurance companies who have now entered the national market with policies specifically designed to insure landlords against tenant damages. While they are active in most states (and are not specifically illegal in Oregon), they are not yet well positioned to do business here, They are currently trying to get legislation sponsored that would make their business model acceptable in our state. (CLICK HERE TO SEE). Asked how many states nationwide they feel legislative support is necessary, I was told Oregon was 1 of only a total of 4. In many ways this validates the concerns of this article regarding the complexity of charging and keeping Security Deposits in Oregon. The success of an insurance solution therefore remains to be seen in the future.
I have a friend who has been a Chiropractor for over 20 years. He says people often come to him with complaints that when they do a certain activity (like sleeping on their side or bending over to tie their shoes, etc.) they get a sharp excruciating pain. His therapeutic advice over the decades has always remained the same: “Then stop doing that.”
This may be good advice for Security Deposits too.