Property Management Q & A - Spring 2021

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Question:

We’ve had two recent client requests at our management company and want to make sure we are doing the right thing before responding.

First, one of our clients (for whom we manage about 200 units) wants to hold 50% of the security deposit funds themselves. Before we even think about whether this is a good idea or not, we want to know if it is legal.

Second, the client is asking us to disburse to them prepaid last month’s rents that we are holding. Again, we normally keep these in our client trust account and want to know if we would be violating rules if we agreed to this.

Answer:

The first question is the easier one. Even though all money is the same color, that doesn’t mean that each dollar in your trust account doesn’t have an owner. Unless or until a portion of a tenant security deposit is forfeited to the landlord (meaning that the tenancy has concluded, you performed the security deposit accounting, and all or a part of the security deposit was applied to tenant caused expenses), the security deposit belongs to the tenant. That is the whole reason RCW 59.18.270 requires it to be kept in a “in a trust account, maintained by the landlord for the purpose of holding such security deposits for tenants of the landlord….” If it were not in a trust account, there would be no way for a creditor attempting to garnish the account to know that it holds something other than monies belonging to the landlord. RCW 59.18.070 also requires the landlord to “provide written notice of the name and address and location of the depository and any subsequent change thereof.”

So, for you to allow the owner to hold any portion of the refundable security deposits, the lease for each tenant whose funds were held by the owner would need to read differently, so that it informed the tenant of where their funds were being held. Furthermore, if there were any deductions from a particular tenant’s security deposits, those funds would need to come from the correct account. My guess is that your client wants to hold half the deposits as a sort of “slush fund” for his or her own purposes, and have you disburse any refunds or deductions from the portion in your trust account, regardless of where any given tenant’s security deposit actually resides. In short, while what your client proposes is theoretically possible, the administrative burdens of accounting for the funds correctly seem to place your designated broker at extreme risk.

Your second question falls into the “you learn something new every day” category. While I consider myself fairly knowledgeable about Washington Department of Licensing regulations, I am not a designated broker and I don’t have day-to-day contact with DOL auditors. It has always been my position that last month’s rents (LMRs) are fully earned by the owner when received and therefore, appropriate to disburse to the owner upon receipt (assuming other conditions of your management agreement are satisfied). I asked for confirmation of my understanding from a DOL auditor, who informed me I was mistaken. Their position is that an LMR is additional security for the owner and therefore not fully earned, thus not amenable to being distributed to the owner until it is applied. I rephrased my question several times to verify my understanding (or lack thereof). I was told that if the lease clearly stated that the funds were earned upon receipt and would be released to the owner (and not held in trust) then it was acceptable to do so. In the absence of such language, the DOL is expecting those funds to remain in the property manager’s hands.

 
 

Christopher T. Benis

Chris is an attorney with Hecker, Wakefield & Feilberg in Seattle. The information contained herein is not legal advice. You are encouraged to consult with your attorney before relying on anything contained herein.


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