Can LL Deduct Costs of Permanent Improvements Made by Tenants and Removed When Property Was Vacated?

[twelvegates]

Jurisdiction

Colorado

1) From about 2011 to mid 2014, LL allowed a couple and their minor daughter to live with her without a rental contract. They paid a portion of the utilities and hoped to buy the house as LL was planning to move in the next few years. They made improvements with her permission (new lights, new vanity, new garage door opener, paint, fake rock on walls, etc.). LL made no guarantee that tenants would be able to purchase house as she had no idea of its eventual value.

2) In mid 2014, LL rented house to tenants at reduced value, hoping they would save enough money for down payment. LL moved away from house a few days after signing a rental contract with tenants and their rental obligation commenced the following month. Contract indicates that all alterations to property require her written approval and also indicates that security deposit can be withheld for: unpaid rent, cleaning costs, key replacement costs, cost for repair of damages above ordinary wear and tear, and "any other amount legally allowable under the terms of this agreement". A plain reading of the rental document provides no other specific wording regarding the security deposit, though it does explain what tenants can and cannot do with the property.

3) In December 2015, LL's financial position changed and she had to sell house. She informed tenants they must be out or buy house before April 1 2016. She signs contract with real estate agent, who prices house $100,000 over what tenants are willing to pay. Tenants contact LL in March 2016, asking that security deposit be applied to last month's rent. LL refuses as she wishes to review condition of property after tenants leave.

4) When move-out inspection is conducted on April 2, tenants had removed all of their improvements, including those "permanently" affixed (i.e., they even chipped off decorative stone they had attached to a wall). The previous fixtures were not reinstalled, as they were evidently discarded when tenant improvements were performed, and cheaper fixtures were put up in their place. They removed hard wiring from the barn, plants in the ground, laminate flooring, etc.

 

[army judge]

The LL can use the security deposit to offset alleged damages to the property, repair costs, and clean up costs.

If the LL asserts that she is out $500, she can withhold $500 from the deposit. If the $500 exceeds the deposit amount, LL can retain the deposit. In either case, LL must provide a full, complete, and accurate accounting of each item claimed totaling up the amount LL alleges was owed by tenant.

Moving on, it's never that cut and dry. Assuming LL claimed $500 in damages, but the deposit was only $300, LL then must take the matter to court in an effort to collect the $200 delta.

Be prepared for tenant blowback. Most tenants expect something, if not all of the security deposit to be returned. If the deposit isn't forthcoming, many tenants will often sue the LL for the disputed amount.

That means you must be able to prove to the satisfaction of a judge that the amount you withheld was reasonable and well documented. You must also be ready to illustrate that you followed your state's deposit law to the letter.

 

[adjusterjack]

4) When move-out inspection is conducted on April 2, tenants had removed all of their improvements, including those "permanently" affixed (i.e., they even chipped off decorative stone they had attached to a wall). The previous fixtures were not reinstalled, as they were evidently discarded when tenant improvements were performed, and cheaper fixtures were put up in their place. They removed hard wiring from the barn, plants in the ground, laminate flooring, etc.

Unless the tenants restored the property to the same condition it was in before they made the alterations, they owe for any damage they left behind.

If the cost of repairs exceeds the amount of the security deposit the tenants can be sued (and lose) for the additional cost.

Whether you are the LL or the tenant make sure the security deposit statute is followed to the letter.

38-12-103.