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A. Introduction
Proper handling of tenant security deposits is an often-overlooked aspect of landlords’ obligations under North Carolina law. However, the North Carolina Tenant Security Deposit Act (the “Act”), N.C. General Statute § 42-50, et seq., provides a clear description of the rights and responsibilities of residential tenants, landlords, and their agents regarding tenant security deposits. Failure to comply with the Act can result in strict penalties. For commercial security deposits, on the other hand, North Carolina law takes a much more “hands off” approach.
B. Residential Security Deposits and the N.C. Tenant Security Deposit Act
For residential rentals, the North Carolina Tenant Security Deposit Act governs how security deposits will be collected, handled, and applied. It is important that landlords comply with the provisions of the Act, or otherwise they could lose their right to retain any portion of the security deposit.
1. Collecting and Holding the Security Deposit
N.C. General Statute § 42-51(b) provides an upper limit on the amount that a residential landlord can charge for a security deposit. For a week-to-week tenancy, a security deposit cannot exceed the equivalent of two weeks’ rent. For a month-to-month tenancy, it cannot exceed the equivalent of a month and half’s rent. For anything longer than a month-to-month tenancy, the security deposit cannot exceed two month’s rent. Pursuant to N.C. General Statute § 42-53, the limits on security deposits do not apply to pet deposits. Residential landlords are free to charge a reasonable, non-refundable pet deposit fee.
For residential landlords, it is important to remember that the security deposit is not considered the landlord’s money until the tenant vacates the property and the security deposit is properly applied. While the tenant is renting the property, N.C. General Statute § 42-50 requires the landlord to hold the deposit in a trust account at a North Carolina bank, except in certain limited scenarios. In some circumstances, and with the consent of all parties, the trust account can be interest-bearing. Within 30 days of the beginning of the lease term, you are required to notify your tenant in writing where the security deposit is being held. As a practical matter, it is often easiest to provide this information in the lease.
If, at any point while a tenant is renting the property, ownership of the property changes, within 30 days of the change in ownership the former landlord must either transfer the security deposit to the new owner or return the security deposit to the tenant (after any applicable deductions).
2. Permitted Uses of the Security Deposit
Section 42-51 of the Act provides an exhaustive list of reasons for which a security deposit can be withheld at the end of a tenancy:
(1) The tenant's nonpayment of rent, as well as costs for water, sewer, and electric services.
(2) Damage to the property, including damage to or destruction of smoke alarms or carbon monoxide alarms.
(3) Damages as the result of the nonfulfillment of the rental period, except where the tenant terminated the rental agreement under statutes protecting military personnel and victims of domestic violence, or because the tenant was forced to leave the property because of the landlord's violation of statutory eviction procedure or habitability requirements.
(4) Any unpaid bills that become a lien against the property due to the tenant's occupancy.
(5) The costs of re‑renting the premises after breach by the tenant, including any reasonable fees or commissions paid by the landlord to a licensed real estate broker to re‑rent the premises.
(6) The costs of removal and storage of the tenant's property after an eviction.
(7) Court costs.
(8) Any fee permitted by contract and/or statute when a landlord evicts a tenant.
Residential landlords cannot keep security deposits for any reason aside from those listed in the statute.
Although landlords can apply security deposits to damages to the rental property, this would not include normal wear and tear. See N.C. General Statute § 42-52; Neil v. Juester Real Estate Servs., 237 N.C. App. 132 (2014). Costs for repainting walls, vacuuming carpets, cleaning bathrooms, etc. likely are not permitted uses for the security deposit. On the other hand, structural damage to walls, cracked or shattered windows, broken fixtures, etc., likely do fall under the Act as applicable damages. While there is little case law distinguishing property damage from normal wear and tear, most magistrates and judges will apply general rules of common sense.
3. How to Apply the Security Deposit
Once the rental agreement is terminated, either through the tenant vacating the property or otherwise, the landlord has 30 days to: (i) provide the tenant with a full refund of the security deposit; or (ii) provide a written, itemized list of how any portion of the security deposit has been applied. This notice and/or security deposit refund would be sent to the tenant’s last known address.
Sometimes, the landlord does not know how much of the security deposit he or she will keep by the end of the 30-day period. This sometimes occurs when the tenant has damaged the property, and the landlord is working with a repairman or contractor to make repairs. If the total cost of damages cannot be determined within 30 days of termination of the tenancy, the landlord can provide an interim accounting of damages within the 30-day period, and then would have an additional 30 days to provide a final accounting. If the landlord decides to take this route, it is very important to indicate that the first notice is an interim, not final, accounting.
When providing written notice to the tenant of how the security deposit was applied, it is important that the landlord be as specific as possible and itemizes damages. Attributing the entire security deposit to “damages to the property” is very likely insufficient. The better practice is to itemize any security deposit allocations down to the dollar and cent. For instance, how much was for unpaid rent? How much was for the broken window? How much was for the water bill that the tenant never paid? If possible, you should attach to your notice any invoices, bills, repair estimates, etc. as evidence of your damages.
4. Tenants’ Remedies for Landlords’ Noncompliance with the Act
The Act provides harsh penalties for landlords that fail to comply with any of its provisions.
According to N.C. General Statute § 42-55, if the landlord violates any provisions of the Act, the tenant can sue the landlord to recover the balance owed on the security deposit. The “willful failure” of the landlord to comply with the Act results in the landlord forfeiting their claim to any portion of the security deposit. In addition, if the tenant proves that the landlord was in “willful noncompliance” with the Act, the tenant can recover attorneys’ fees for pursuing their claim.
Landlords do not want to be in a position of having to explain to a court why they misapplied a security deposit. Often, spending a bit of time making sure the security deposit is properly maintained and applied can prevent many disputes and headaches later on.
C. Commercial Security Deposits
Unlike with residential tenancies, North Carolina law is much more “hands off” with commercial security deposits. By its terms, the N.C. Tenant Security Deposit Act only applies to residential tenancies, not commercial tenancies. See N.C. General Statute § 42-50 (applying the Act only to “residential dwelling units”). Our state’s legislature, when drafting the N.C. Tenant Security Deposit Act, recognized that in commercial settings tenants often have much more business sophistication and bargaining power, and did not impose similar requirements on commercial landlords.
This means that the requirements in the N.C. Tenant Security Deposit Act do not apply to commercial landlords. For instance, commercial landlords are not required by statute to keep tenant security deposits in a trust account, and they also have no statutory notice requirement when applying security deposits after a tenancy ends. Instead, any such requirements would be addressed in the rental contract/lease.
When negotiating a commercial lease, it is important to address issues related to the security deposit. For instance, the contract should list out reasons why the landlord can keep the security deposit. It is often a good idea for landlords to state in the contract that they can apply the security deposit for repairs during the tenancy, and if so, the tenant is required to replenish the security deposit.
While some of the statutory requirements under the Act might be good business practice, they are not required for commercial landlords. Commercial landlords should be sure to state in their rental contracts exactly what they want the rights and obligations of all parties to be regarding security deposits.
D. Conclusion
The N.C. Tenant Security Deposit Act provides a clear framework for the obligations of residential tenants and landlords when it comes to security deposits. It is important that landlords are aware and follow these provisions, because violating the N.C. Tenant Security Deposit Act can result in severe penalties for landlords. Commercial landlords, on the other hand, do not face the requirements of the N.C. Tenant Security Deposit Act. However, commercial landlords should still be careful to clearly delineate in their rental contracts how security deposits are handled.
DISCLAIMER: The information in this article is provided for informational purposes only. It is not offered as and does not constitute legal advice. The accuracy of the information may change pending changes in applicable law. If you have questions about a specific matter, you should contact a lawyer. The use of this article or any information provided in it does not establish any lawyer/client relationship.
If you would like to discuss a dispute arising in the context of landlord/tenant law, please contact The Law Offices of Peter Isakoff at (336) 863-8348 (Main) or (336) 864-9115 (Español).
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