Tenants usually ship substantial safety deposits once they signal leases. These deposits are presupposed to safe the tenant’s obligations. On the finish of the lease, if the tenant has correctly behaved, the owner ought to return the safety deposit to the tenant. It’s not the owner’s cash, or is it? Perhaps it’s—if the owner recordsdata chapter.
A latest New York case thought-about precisely this sequence of occasions. A tenant below a lease in Chicago gave the owner a considerable safety deposit. The court docket discovered that these funds had been, below Illinois legislation, successfully nothing greater than a mortgage to the owner. When the owner filed chapter, the tenant had the identical rights as some other creditor that lacked safety for its declare. On this case, that meant the tenant would get well little or no on account of its unintended mortgage to the owner.
The court docket based mostly its choice partially on the phrases of the lease itself. The lease required the tenant to submit and keep a safety deposit. It mentioned nothing, although, about possession of the safety deposit or how the owner was supposed to carry it. Nowhere did the owner agree to carry the safety deposit in belief, a segregated account, or some other particular means.
The lease simply mentioned the owner would return the deposit (minus any correct offsets) to the tenant 30 days after the lease expired. In consequence, the deposit was merely cash that the tenant gave the owner that the owner was supposed to provide again later—functionally nothing greater than a mortgage.
Some states set the next commonplace for a way a landlord offers with a safety deposit. In New York, for instance, the owner should maintain the safety deposit in belief in a separate account for the good thing about the tenant. By legislation, the deposit stays the cash of the tenant, not the owner.
Sadly for the tenant on this explicit case, nevertheless, Illinois doesn’t have a statute like New York’s, at the least for industrial tenants. (Illinois does, nevertheless, have protections for residential safety deposits.) That meant the owner may freely commingle the safety deposit with its different funds. When the owner filed chapter, the safety deposit was simply more cash within the landlord’s fingers. The tenant’s declare for its safety deposit was simply one other declare within the chapter, entitled to cost of pennies on the greenback if that.
This unhappy saga teaches tenants that once they ship safety deposits below leases, particularly substantial safety deposits, they need to give some thought to the authorized protections for these safety deposits. Favorable lease language helps, as does favorable state legislation. If any uncertainty stays and the tenant has any negotiating leverage, nevertheless, the tenant may insist on establishing an escrow or related association to guard the safety deposit. That is very true if the tenant has motive to consider that the owner might quickly endure monetary issues or go bankrupt.
Within the litigation described on this article, the owner was truly a tech firm that was a sublandlord, not a property proprietor. The tech firm entered into the sublease as a result of it didn’t want all of the house it had leased, and it was shrinking. These info alone in all probability ought to have set off alarm bells for the tenant.
