Returning Security Deposits

Property managers and land lords commonly use security deposits to control the risks associated with renting out property. However, the handling of security deposits brings with it its own risk. Mismanagement of the security deposit can increase liability. South Dakota real estate law dictates how the security deposit must be handled. For example, within two weeks of the tenant moving out and delivering their forwarding address to the landlord, the deposit must be returned, or a written statement must be sent to the tenant stating why part or all of the deposit is being withheld. If not followed, the law provides for punitive damages against the landlord. Often private landlords do not know or follow the law relating to security deposits. The incorrect handling of security deposits can harm both landlords and tenants. For example, spending the deposit instead of setting it aside in a separate account can mean that the landlord will not have the money to return to the tenant at the end of the lease. During the housing crisis, many tenants found that their former landlord walked away with the deposit once the property was foreclosed upon. The bank or the next landlord are not obligated to return the deposit because they did not receive the deposit. The tenant’s only recourse was to go after the previous landlord/property owner who was most likely bankrupt. Renting from a professional property management company can help mitigate the risk of losing the deposit because the management company holds the deposit in a federally insured trust account and does not give it to the property owner. If the property owner defaults on their mortgage, the security deposit is still available to the tenant from the management company. Another law that applies to the security deposit is that the landlord can require a maximum security deposit of one month’s rent. Whenever dealing with legal matters, landlords and tenants should consult with their attorney.