Kimberly Seay
Senior Symposium Editor
Loyola University Chicago School of Law, J.D. 2018

Landlords have a duty to know the laws applicable to their properties, in all matters great and small. While security deposits may seem on the “smaller” end of a landlord’s duties, he or she must remain compliant with all state and local municipal laws—even when handling security deposits. Whether a large or small residential unit landlord in the City of Chicago, a violation of the state and municipal security deposit laws can have a catastrophic domino effect, resulting in lost revenue, penalties, and lawsuits. In fact, some landlords have had to shell out six-figure settlements and file for bankruptcy as a result of violating the laws surrounding security deposits.

Background

Most states, including Illinois, hold landlords to strict rules. Those who violate these laws may lose the deposit in its entirety and incur substantial penalties. The Illinois legislature and the governing bodies of several municipalities, including the City of Chicago (“Chicago”), have recognized that security deposit abuse exists in the residential realm and consequently established laws to provide tenants a remedy.

Residential security deposit laws

Relevant law on security deposits for residential leases is comprised of state law and applicable local municipal law. Illinois state law has two relevant security deposit statutes: The Security Deposit Return Act and the Security Deposit Interest Act. Under Illinois law, there is no maximum or minimum legal amount for residential security deposits, but most range from one to two times the monthly rent. While the landlord is in possession of the security deposit, it remains the tenant’s property.

The Security Deposit Return Act

Under the Security Deposit Return Act (“SDRA”), a landlord cannot withhold a security deposit for damages to the property unless the landlord provides the tenant with an itemized list of damages and repairs. The SDRA defines a landlord as the owner of residential real property which contains five or more units in an apartment complex or single building. Furthermore, the landlord must have received a security deposit from a tenant to secure the payment of rent or to reimburse for damage to the leased property. Only under these conditions may the landlord not withhold any part of that deposit as compensation for property damage. In these circumstances, a written itemized statement of the damage allegedly caused to the premises and the estimated or actual cost for repairing or replacing each item must be provided to the tenant within 30 days of the tenant vacating the premises. Paid receipts, or copies, should be attached where applicable.

If a landlord refuses to provide the required itemized statement, or has provided the itemized statement in bad faith (meaning deliberately deceitful), and has failed or refused to return the amount of the security deposit due within the time limits provided, the landlord shall be liable for an amount equal to twice the amount of the security deposit due, as well as court costs and reasonable attorney’s fees. For a $1,700 security deposit, this would mean the landlord could owe the tenant $3,400 for the security deposit penalty, the return of the $1,700 security deposit itself, the court costs, and attorney’s fees for both themselves and the tenant, culminating in a potential amount of over $6,800.

The Security Deposit Interest Act

In addition to the potential penalties from the Security Deposit Return Act, landlords should be cautious when handling the interest collected on their tenants’ security deposits. The Illinois’ Security Deposit Interest Act (“SDIA”) applies to landlords of residential real property, which contain twenty-five or more units in a single building or a complex of buildings located on contiguous (touching) parcels, and who receive a security deposit from a tenant to secure the payment of rent or to reimburse for damage to the leased property. These landlords shall pay interest to the tenant from the date of the deposit, at a rate equal to the interest paid by the largest commercial bank, on any deposit held by the lessor for more than 6 months. If a landlord willfully fails or refuses to pay the interest due to the tenant, they are liable for the security deposit in its entirety, along with court costs and reasonable attorney’s fees.

The Chicago Residential Landlord and Tenant Ordinance

Municipal law regarding the holding and return of a security deposit in Chicago is much more stringent than the state level law and greatly favors tenants over landlords. The Chicago Residential Landlord and Tenant Ordinance (“CRLTO”) applies to, regulates and determines rights, obligations and remedies under every rental agreement for a dwelling unit located within the city of Chicago. It has been liberally construed and applied, meaning it is generally tenant friendly.

Under the CRLTO, there are multiple requirements that landlords must adhere to when holding a security deposit. If a landlord fails to comply with anything in that section, the tenant shall be awarded damages in an amount equal to two times the security deposit plus interest at a rate determined in accordance with Section 5-12-081. Furthermore, the tenant can also recover other damages entitled under Section 5-12-080, which include attorney’s fees and costs. If a landlord commingles a tenant’s security deposit with their assets, even for a second, they are in violation of the CRLTO, and would be an expensive lesson to learn.

Violating the CRLTO security deposit requirements is so easy that many landlords are no longer collecting a security deposit, but rather a non-refundable “move-in fee.” In response to this movement and to lessen the non-refundable fees tenants would be subjected to by easing the restrictions on landlords, there was an amendment to Section 5-12-080 on July 28, 2010 that created an exception to Section 5-12-080(a)(1). That exception, Section 5-12-080(a)(2), allows a landlord to accept the payment of the first month’s rent and security deposit in a single check and deposit into one account, if within five business days of the acceptance of the check, the landlord transfers the amount of the security deposit into a separate account that complies with subsection (a)(1). On its face, this amendment appears to be helpful to landlords, but depositing this double check into a general operating account before transferring the security deposit into a separate account can be easily mismanaged and fatal to a company. If an employee mishandles a combined rent and security deposit check and does not remove the security deposit within five days, they would be in non-compliance with the strict CRLTO law.

With the current interest rate, landlords typically owe pennies on security deposits; which does not exactly entice them to being proactive regarding compliance with the CRLTO. Additionally, those pennies alone do not warrant litigation against a landlord who refuses to abide by the law. The Supreme Court of Illinois reiterated in its Lawrence opinion that, “without the prospect of liability for significant additional damages, landlords would therefore have little incentive to meet their statutory obligations. They could withhold the interest payments with impunity. And many do… failure of landlords to pay interest on security deposits is a pervasive problem in the City of Chicago.” Chicago’s legislature goal is to protect the tenant against corrupt landlords, but the laws unfortunately snag and harm many good landlords. However, as someone running a business, and presumably a profit, it is their duty to ensure compliance with all applicable laws.

Compliance & developing a corrective action plan

In the City of Chicago, having a lawyer to draft leases is not enough for mass unit landlords, such as Horizon Group Management (“Horizon”); they should invest in a compliance department to audit and monitor their activities.

A landlord does not have to willfully violate the CRLTO to be held liable, as must be done with the state law. Any violation of the CRLTO would be a costly and preventable mistake. Furthermore, any unknown violation would be far costlier as the landlord would most likely end up acquiring more violations and damages due, which could have been prevented. Moreover, if a new employee is unaware of the CRLTO law and over the course of several years unknowingly bungles security deposits, per CRLTO, they could harm the company as a whole. Horizon, or another company like it, increases their liability with every new tenant, and could have a class action filed against them, as was the case with Horizon recently.

If Horizon had an efficient compliance officer and compliance program, it could have identified the issue at hand, and created a corrective action plan. This would lessen future damages and protect the company. The Office of Inspector General (“OIG”) has supplied seven fundamental elements of an effective compliance program. Those seven elements are as follows: Designating a compliance officer and compliance committee; implementing written policies, procedures and standards of conduct; conducting effective training and education; conducting internal monitoring and auditing; developing effective lines of communication; responding promptly to detected offenses and undertaking corrective action; and enforcing standards through well-publicized disciplinary guidelines.

To have an effective compliance program at Horizon, the designation of the compliance officer would need to be made known to all employees. The policies and procedures created by Horizon would need to be programmatic of subject matter, such as the mechanics of policies of non-retaliations and regulations under the compliance. The third OIG element that should be incorporated into Horizon’s company policy is training, which would be particularly important to it in a corrective plan: employees who are given notice of a new policy, and trained on how to comply with it in their roles, are less likely to create liability for the company. There are other Illinois statutory provisions that Horizon employees should be knowledgeable about, but there are not so numerous that a compliance officer would have to pick and choose which to train. After training is conducted, internal auditing and monitoring is crucial to ensure employees are acting on their training. This could have ultimately saved Horizon from a company-wide destructive issue, and would help decrease the risk of liability. In addition to training and monitoring, effective lines of communication also come into play when developing a corrective action plan; this usually breaks down to having a company hotline, but any means of communication between employees and the compliance department would be valid. A challenge in establishing a hotline will be in ensuring it is used properly, but educating people on which issues to report can help alleviate the inappropriate calls. Demonstrating quick responses to suspected non-compliance and undertaking corrective action would assist Horizon in lessening non-compliance with their security deposits.

The OIG’s last element, discipline, should be well-publicized. Horizon employees will hopefully consciously make an effort if they realize there are individual repercussions for noncompliance. Sometimes organizations fail, rather than the individuals, due to not having something in store for failures at the most basic level—developing a disciplinary process in case can keep the company standing.

Conclusion

While it may not be feasible for every landlord to have a compliance department, it would behoove them to at least meet with an attorney or compliance trained professional to understand what is required of them and what laws to review for changes. Unfortunately, when it comes to the stringent regulations of Chicago, ignorance of the law is no excuse.

 

UPDATED as of 11/1/17 to correct a mathematical error.