When I bought this rental property I was told by the seller that the tenant did not have a security deposit. Now the tenant is moving out and is demanding that I return his security deposit. What should have been done?
By law in most states, the current owner is responsible for the deposit even if not given credit for the amount at close of escrow. If there was in fact a deposit you will have to fund any part of it being returned. It would then be up to you to attempt to collect the deposit amount from the seller.
This type of after-closing problem could have been avoided by utilizing Estoppel Certificates and making execution by all tenants a contingency in the purchase offer.
An Estoppel Certificate is a document signed by all tenant of each rental unit that, among other things (1) affirms the lease documents (attached to Certificate) and the deposit/rent amounts; (2) confirms that there are no agreements outside of the attached documents; and (3) confirms the amount of security deposit, the current rent, and the date to which rent has been paid. In addition to verifying information provided by the seller, the Estoppel Certificate stops the tenant from making claims regarding the included issues after close of escrow.
You should have obtained a copy of each tenant’s lease agreement prior to buying the property in order to confirm what the seller told you. Additionally the tenant’s original lease agreement should have been turned over to you upon close of escrow.
If you have a lease agreement copy from the seller confirming that there was no deposit and the tenant claims different, ask the tenant to provide a copy of an amendment or addendum showing changes. If there is a discrepancy, you will need to resolve it by comparing dates of execution and signatures between the documents. If there is only the tenant’s version, you may have to go by that unless the seller is willing to testify differently.
If there is no written agreement, you could have a bigger problem since it will be the word of the tenant against the word of the seller. And, the seller may have no interest in being involved in a problem after close of escrow.
Unless adequate documentation was used by the seller, including a detailed move-in checklist that was provided to you by the seller, there will be additional problems if you try to deduct from the deposit any amounts for damages that occurred prior to your documentation of the condition of the property during an inspection following close of escrow. Of course, return of the deposit and/or an accounting for any portion not being returned must be provided the tenant within the time required by your state’s law.