Security Deposits under the Chicago Residential Landlord and Tenant Ordinance; More Danger than Security?
Few States and large cities in the U.S. have landlord-tenant laws as unique and tenant-friendly as Chicago. In fact, when it comes to acceptance and use of security deposits in the “second city,” there are a number of pitfalls that can expose landlords to a great deal of liability. Failure to comply with just one of the many requirements of the Chicago Residential Landlord and Tenant Ordinance (“RLTO”) can result in a judgment against a landlord equal to two times the security deposit plus interest, court costs, and reasonable attorney’s fees.
The provisions of the RLTO apply to every rental agreement for a dwelling unit located within the City of Chicago, regardless of where the agreement is made. This includes rental agreements entered into by and between condominium associations and tenants, after filing an eviction and taking possession of the unit due to the unit owner’s non-payment of assessments. The RLTO does not apply to some residential properties, including owner-occupied buildings containing 6 units or less; hotels, motels, rooming houses and boarding houses; and cooperatives occupied by a holder of a proprietary lease.
This article focuses on section 5-12-080 of the RLTO, which controls the procedure for receiving, holding, returning, transferring and deducing from security deposits for Chicago residential properties. Among other things, the section requires a detailed receipt at the time a security deposit is accepted by the landlord, and expressly prohibits the commingling of the security deposit funds with other finances. Moreover, 5-12-080 requires the periodic payment of statutorily-defined interest on security deposits. It further dictates when and how the security deposit should be returned to the tenant, and how unpaid rent or damages can be deducted. Finally, 5-12-080 imposes strict requirements upon landlords in the event of the sale or transfer of the rental property.
According to Section 5-12-080 of the RLTO, a landlord must hold all security deposits received in a federally insured interest-bearing account in a bank, savings and loan association or other financial institute located within Illinois. The security deposit and accruing interest continue to be the property of the tenant and cannot be “commingled” with the assets of the landlord. This means that security deposits may be not placed in the same account used to deposit rents received. It is highly advisable that security deposits be placed in their own separate interest-bearing account.
At the time the landlord or his/her agent receives the security deposit a receipt must be provided to the tenant or prospective tenant indicating a) the amount of such security deposit; b) the name of the person receiving it; c) the date on which it was received; d) and a description of the dwelling unit. If an agent of the landlord (e.g., property manager) receives the security deposit, the receipt must contain the name of the landlord for whom such security deposit is received. The receipt must also be signed by the person receiving the security deposit.
Any landlord holding a security deposit or prepaid rent for more than six months is required to pay interest to the tenant accruing from the beginning date of the rental term, determined in accordance with Section 5-12-081 of the RLTO. Pursuant to 5-12-081, the landlord is required to pay interest on security deposits in the amount of 0.12% for the 12-month rental period beginning in 2009. The interest must be paid to tenants within 30 days after each 12-month rental period. As an alternative to actually disbursing the interest to the tenant as a payment, such interest may be applied as a credit against the rent.
Within 45 days after vacating the property, or within 7 days after the date a tenant provides notice of termination of the rental agreement, the landlord is required to return the security deposit, or the balance, and required interest less any deductions. The landlord is permitted to deduct two types of expenses from the security deposit: a) any unpaid rent that has not been validly withheld; and b) a reasonable amount necessary to repairs any damages caused to the property by the tenant or any other person acting under the tenant’s control or consent.
The landlord may not deduct from the security deposit for ordinary wear and tear. Moreover, in cases of deductions for damages, the landlord is required to provide an itemized statement of the damages allegedly caused and the estimated or actual cost for repairing or replacing each item. The landlord is also required to attach copies of any paid receipts for repair or replacement to the statement. This statement must be provided within 30 days after the tenant vacates the property.
In cases where the rental property is sold or otherwise transferred, the original landlord receiving a security deposition or prepaid rent remains liable to the tenant for any security deposit, including statutory interest, or prepaid rent, unless proper notice of transfer is given to the tenant. In order to provide proper notice, the landlord is obligated to notify the tenant that the security deposit has been transferred to and is being held by the successor landlord. Such notice must be given to the tenant within 10 days from the date of such transfer. The notice must contain the successor landlord’s name, business address, and the business telephone number of the successor landlord’s agent, if applicable. The notice must be in writing and must be hand-delivered or mailed to the tenant’s last known address. Until such notice is given, the transferor remains jointly and severally liable with the successor landlord to the tenant for any such security deposit or prepaid rent.
The RLTO has been interpreted by the Illinois Supreme Court to impose “strict liability,” meaning that a landlord violating any of the provisions of 5-12-080 is responsible for the damage and loss caused by his/her acts, regardless of culpability and actual knowledge of the law. Section 5-12-080(f) holds that if a landlord or landlord’s agent fails to comply with any of the aforementioned requirements, “the tenant shall be awarded damages in an amount equal to two times the security deposit plus interest.” Moreover, except in cases of forcible entry and detainer (evictions) the prevailing plaintiff in any action arising out of section 5-12-080 of the RLTO shall be entitled to all court costs and reasonable attorney’s fees.
Given the inherent danger and risk poised by accepting security deposits in Chicago under section 5-12-080, many question the value and benefits of requiring security deposits from tenants. Accepting such security deposits without a detailed understanding of the multi-faceted requirements imposed by the RLTO could be like walking through a minefield, especially for new landlords or those with comparatively few rental properties.
What can a landlord do to avoid falling in one of the many pitfalls posed by 5-12-080 without becoming an RLTO expert? First and foremost, hire a sophisticated property manager. Many established management companies can offer a wealth of knowledge and expertise in dealing with the Chicago rental properties and security deposits. They can accept security deposits on behalf of landlords and make sure they are following the protocol established by 5-12-080 and other sections of the RLTO. Second, keep your attorney on speed-dial. We are always happy to answer your questions and help you resolve any landlord-tenant issues!
Finally, as an inexpensive alternative to the first two options: don’t accept security deposits, or only accept prepaid rent. The only sure way to avoid the liabilities posed by 5-12-080 is to not accept security deposits from tenants. On the other hand, landlords may want to secure some level of protection by requiring prepaid rent. It is noteworthy that the receipt requirement and anti-commingling provisions of the RLTO do not apply to prepaid rent.
Accordingly, a landlord may accept prepaid rent (e.g., first and last months’ rent) and deposit the same with other funds or in the same account used to deposit regular monthly rents. Moreover, landlords are not required to deposit prepaid rent in an interest-bearing account in a bank or other financial institution located within Illinois. Furthermore, the landlord is not required to produce a detailed receipt at the time prepaid rent is accepted.
Conversely, the provision requiring the periodic payment of interest is applicable to prepaid paid rent in addition to security deposits. Moreover, the notice requirements applicable upon sale or transfer of the property also apply to prepaid rents. Nevertheless, acceptance of prepaid rents appears to create less potential liability for landlords compared to security deposits.
Originally published in December 2009.
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