Why Chicago Landlords Should Not Take Security Deposits
I should first and foremost make it perfectly clear that the follow advice is geared specifically toward Chicago (and maybe also Evanston) residential landlords. If you are a commercial landlord, or a residential landlord somewhere else in Illinois, feel free to scroll past this to another blog post, because it does not apply to you.
Now that I have the major disclaimer out of the way, let me tell you why it’s a bad idea to accept security deposits in Chicago. The City of Chicago has a law on its books called the Chicago Residential Landlords and Tenants Ordinance (RLTO). The RLTO imposes a number of fairly onerous requirements on landlords with respect to security deposits. For example:
- Security deposits must be held in a federally insured interest-bearing account and cannot be commingled with with the landlord’s assets.
- The name and address of the bank where the deposit will be held must be disclosed conspicuously in the lease.
- Upon accepting the deposit the tenant must be given a written receipt with the name of the person receiving the deposit, the name of the landlord (if not the person receiving the deposit), the date, and a description of the dwelling unit. The receipt must also be signed by the person receiving the deposit.
- Interest must be paid to the tenant on all deposits held more than six months. Interest is paid once a year at a rate established by the city comptroller. The landlord is responsible for figuring out how much.
- Any deductions from the deposit for repairs must be itemized in a written statement, accompanied by supporting invoices. These documents must be given to the tenant within 30 days.
And the list is not exhaustive! The consequences for violating any of these requirements are damages in an amount equal to the amount of the security deposit and payment of the tenant’s legal fees and costs! And believe me, there are handful of attorneys here in Chicago, who are more than happy to build up a massive bill just to stick it to the landlord. Can you imagine owning a 100 unit building and having to comply with all of these requirements for every deposit you receive? You would never get anything else done.
Fortunately there is a solution called the non-refundable move-in fee. Some savvy landlord figured out that if the up front payment by the tenant is not refundable, it is not a deposit. The fee is typically $500-$1,000 for each move-in, and it is not given back to the tenant at the end of the lease term. Now that it isn’t a deposit, you do not have to meet the requirements of the RLTO; at least with respect to security deposits. Importantly, the Courts have endorsed this strategy. In Steenes v. MAC Property Management, LLC, the Illinois First District Appellate Court held that a move in fee is not a security deposit under the RLTO, as long as the amount of the fee is considerably less than the monthly rent and it is not refundable. 2014 IL App (1st) 120719.
Let’s face it, the upside for having a security deposit is far outweighed by the potential liability faced for a violation. Take my word for it, the Courts take the RLTO very seriously, and if you find yourself in this situation, it will be expensive. It also makes sense from a business perspective. Unless you don’t properly vet your tenants, most of them are not going to trash your place, regardless of whether or not you are holding a security deposit. If you bank the move in fees, you’ll have money in your pocket to deal with the naughty tenants. And you’ll never have to write a check to a tenant who has already stiffed you on rent (or their attorney).
I spend an inordinate amount of time writing on real estate transactions, so this one is for all of you landlords. An eviction is a big deal for any landlord. They are expensive. Not only are you paying an attorney, but you also have to fund mortgage payments and other costs out of pocket until you can get rid of the bad egg and replace them with a paying tenant. If you find yourself in this situation, I recommend acting quickly. The eviction process can be lengthy, so the sooner you call me, the better.
As always, please do not hesitate to contact me at 773-632-8330 or firstname.lastname@example.org. And finally, as always, I am honored by your referrals. To learn more about my practice, please contact me!