Security Deposits in North Carolina

Security Deposits in North Carolina, and the proper way to handle them present challenges for a lot of Fayetteville, North Carolina landlords and property investors.

As a property management company, we have seen many property owners not follow the North Carolina Landlord Tenant laws when it comes to security deposits in North Carolina. As a result, a few of them have ended up violating the law, and suffering the consequences as a result.

Who is this Security Deposits in North Carolina Guide For?

While we primarily provide property management services for Fayetteville, Hope Mills, Lillington, Spring Lake, Raeford and Sanford, North Carolina, this guide to security deposits in North Carolina can be used by anyone in the state.  This is also true if you are a property owner in Cumberland County, Hoke County, Harnett County, Lee County, Moore County, or Robeson County.

The North Carolina security deposit law is in effect statewide, and all counties and municipalities throughout the state are obligated to follow them.

The following is an overview, or a way ahead of what we will discuss in this security deposit guide.  The key points this guide will cover are:

  1. Who Has a Duty Under the North Carolina Security Deposit Act
  2. Where Are Deposits from Tenants Kept Under the North Carolina Security Deposit Act
  3. What is the Landlord Permitted Use for the North Carolina Security Deposit
  4. North Carolina Security Deposits and Property Damage
  5. What Maximum Amount Can Be Charged for a Security Deposit in North Carolina
  6. When Does a Landlord Return the Security Deposit in North Carolina
  7. Is a Pet Deposit Considered the Same as a Security Deposit
  8. Landlord Transfer of Ownership and the Security Deposit in North Carolina
  9. What Can a Tenant Do if A Landlord Does Not Follow North Carolina Security Deposit Law

As you can see, from this extensive list of things to cover, security deposits in North Carolina involve more than just taking money from a tenant, and placing it in a bank account.

In fact, security deposit law covers seven sections of the North Carolina Landlord Tenant Act, and can be found generally in North Carolina General Statute, sections 42-50 thru 42-56, titled the Tenant Security Deposit Act.

While the North Carolina Tenant Security Deposit Act is not as long as some of the other portions of the North Carolina Landlord Tenant laws, it is an equally as important, if not more, as some of the other sections.

For purposes of clarity, this guide will follow the organization of the Tenant Security Deposit Act.  By conducting our analysis in this manner, you will be able to follow along with the act for maximum understanding.

Additionally, where applicable, we will provide you some insight into some of the relevant court cases, or regulatory guidance dealing with security deposits in North Carolina.

Key Point 1:  Who Has a Duty Under the North Carolina Security Deposit Act

Like other rules in the landlord tenant act, you as a landlord have a duty to follow the laws governing security deposits.  In defining the applicability of the North Carolina Landlord Tenant to certain parties, the state legislature defined a landlord as

“. . . .any owner and any rental management company, rental agency, or any other person having actual or apparent authority of an agent to perform duties.”

What this means, is that you must be aware of all of the laws dealing with landlord tenant relations, and those governing security deposits in particular. You, as a landlord, are held to the same standards as a real estate company, even if you only have one property in your portfolio.

This is important to remember, because ignorance of a statute is not an excuse, and could have you end up in hot water.  The bottom line is that you must follow the basics of North Carolina Security Deposit Law.

Key Point 2:  Where Are North Carolina Security Deposits Kept 

North Carolina makes it clear that security deposits from tenants in North Carolina should be kept in a bank in North Carolina.

Further, the law mandates that the bank account must be a trust account.

These are two very important points that we must dissect completely so that you have a very through understanding, as this is where many landlords get it wrong, and can cost you more than the security deposit in the long run.

What is a Bank in North Carolina for Security Deposit Purposes

The Security Deposit Act define a bank in North Carolina as one that is federally insured and licensed to do business in North Carolina. Further, the bank can be either a depository institution, or a trust institution.

An additional component of this is that the bank where the security deposit is kept, must have a branch physically in North Carolina.

Where this becomes an issue, especially in Fayetteville, North Carolina with our large military population, is when a landlord deposits money into a bank that is not physically present in North Carolina, and/or may not be authorized to conduct business in North Carolina.

The common scenario is when landlords, who are in the military, deposit the tenant’s security deposit into a USAA bank account. Depositing the security deposit in any bank, other than one in North Carolina, is a violation of the North Carolina Tenant Security Deposit Act.

It is important to note, however, that depositing the security deposit in a bank outside the state is not completely barred.  It is incumbent upon you as a landlord, however, to follow the specific method to do so, without running afoul of the law.

In order to deposit the tenant’s security deposit in a bank outside of the state of North Carolina, you must take two additional steps:

First, you must post a bond for the security deposit amount. This bond must also be furnished from an insurance company licensed to do business in North Carolina.  What this means is that even though you may be in Texas, you have to get the bond from an insurance company doing business in North Carolina.

Second, the security deposit must be placed in a trust account, not in the personal bank account of you as a landlord. We will discuss real estate trust accounts in the next section.

What is a Real Estate Trust Account for Purposes of the North Carolina Security Deposit Act

The establishment of a trust account is also an area where landlords in North Carolina frequently get themselves in hot water.

The good meaning landlord will usually take the tenant’s deposit, and place it in their personal account.  In the alternative, if they have registered their business as a Corporation or LLC for real estate investing, they may place the security deposit in their business account.

Both of these scenarios are in violation of the North Carolina Security Deposit Act. Tenant funds, should never be comingled with the landlord’s personal or business funds.

In other words, you are holding the security deposit in trust for the tenant. What this means is that the security deposit is actually the tenant’s money.  As the landlord you are holding it for the tenant, unless a trigger occurs where you are authorized to deduct money from the deposit.

We will discuss the triggers for deductions later, but for now, let’s get back to the establishment of a trust account.

A real estate trust account, is an account designed to keep tenant deposits and payments separate from the operating capital of the business, or the personal account of the landlord.

The security deposit funds in the trust account are for the use and benefit of the tenant. These funds are considered, and remain, tenant funds, until a triggering event gives the landlord the authority to use them.

As stated above, commingling of funds should never occur.  Commingling occurs when you place funds that are earmarked for a particular purpose, into an account that is not designed for that particular purpose.

Some common examples of commingling include:

  • Company and personal funds deposited into the security deposit trust account
  • Security deposit funds are deposited into the company or personal account
  • The landlord conducts business from the trust account
  • Security deposit funds are used to cover other expenses

It is good practice for you to maintain good records for your trust account.  This is especially important when you manage and own multiple properties, but still as important if you only have one property.

Some good records to keep include:

  • Present and past lease agreements with the amount of the security deposit.
  • A separate registry, in whatever form, for the security deposit trust account.
  • Records of all transactions to and from the trust account.
  • Copies of all reports that may have been issued to your tenant concerning the security deposit trust account.
  • Records indicating the withholding, or deduction, from the security deposit trust account, including any supporting documents and the reasons why.

As a landlord and property investor, it is important that you keep copious records of your security deposit. You must maintain diligent records, just as a property management company in Fayetteville, North Carolina would.

You will be held to the same standard, as required by law.  Any missteps could potentially end up with you unable to serve as a property manager for your properties in North Carolina.

One last point about the trust account.  If you own several properties, you do not have to establish a separate account for each property.  You can hold all security deposits in one North Carolina security deposit trust account.  Just make sure you have proper accounting for each property.

Notification to Tenant of Security Deposit Location in North Carolina

Under North Carolina law, you are required to provide the tenant with certain notices in relation to the security deposit.

Within 30 days after the beginning of the lease agreement you must notify your tenant of the name and address of the bank or institution that is holding the security deposit. If you opted to place a bond you must also provide the tenant with the name and location of the insurance company that is licensed to practice business in North Carolina.

As a practical matter, you may also want to identify if the account is a trust account (which it should be), as well as provide the tenant with the account information for the trust account.  You can never provide too much information, and our rule is always to error on the side of too much.

Key Point 3:  What is the Landlord Permitted Use for the North Carolina Security Deposit

As we stated earlier, the security deposit in North Carolina is held in trust for the benefit of the tenant.  The law does, however, recognize certain instances which trigger a landlord’s right to deduct funds from the security deposit.

Specific reasons annotated in the North Carolina Security Deposit Act triggering a landlord’s right to permitted use include:

  • Nonpayment of rent
  • Nonpayment of utilities
  • Damage to premises beyond normal wear and tear
  • Breaching of the lease, not do to fault of the landlord
  • Any unpaid bills that become a lien against the property due to the tenant’s occupancy
  • Cost of re-renting the property because of the tenant’s breach
  • The cost of removal or storage of the tenant’s property after having to evict the tenant in North Carolina.
  • Court costs
  • Any fees authorized under North Carolina General Statute 42-46, Late Fees and Eviction Fees

Although these are all permitted uses for the security deposit in North Carolina, as we stated earlier, it is a good practice for you as a landlord to ensure you have proper documentation for the deduction.

Additionally, you may want to consider including a clause in the lease agreement stating that the tenant must replenish the funds, and also provide a time frame by which the tenant must do so.

You don’t want to end up in a situation, at the end of the lease, where funds aren’t available, if necessary, to bring the unit back up to rent ready condition.

Key Point 4:  North Carolina Security Deposits and Property Damage

You must also be aware that you cannot apply the security deposit to unpaid rent.  In other words, you cannot use it as a payment against last month’s rent.

If your intent is to use the security deposit for full or partial payment of the previous month’s rent, you must have a written agreement in the lease agreement to use any of the security deposit for a prior month’s rent, as this is not something that is specifically addressed in the statute.

Along similar lines, when withholding the rent for damages, you must ensure it is not normal wear and tear. Further, North Carolina law expressly prohibits exceeding the amount of your claim for damages.  The claimed amount for damages must be the actual cost, not an arbitrary increase to take more money from the security deposit.

The North Carolina Security Deposit Act states, in relevant part that:

The landlord may not withhold as property damages part of the security deposit for conditions that are due to normal wear and tear nor may the landlord retain an amount from the security deposit which exceeds his actual damages.

Normal wear and tear is a deterioration in the property as a result of the normal use of the property.  This includes use that is not the result of tenant negligence, abuse, or misuse of the property.  It also doesn’t include minor stains or minor cosmetic damage to your property.

Damage, conversely, is destruction or severe damage due to the fault or neglect of the tenant. This often occurs intentionally by the tenant, or through neglect, abuse, or misuse.

Another issue that landlord’s face is charging a cleaning fee.  Notwithstanding a tenant who leaves the property in an utter state of disarray, a landlord is not permitted to charge a cleaning fee against the security deposit, unless it is expressly written into the lease agreement.

Always remember, that if the damages to your property exceeds the amount of the security deposit, you can sue your tenant for property damages in excess of the amount of the security deposit.

Key Point 5:  What Amount Can You Charge for a Security Deposit in North Carolina

North Carolina sets a maximum amount you can charge for a security deposit.  The maximum amount is based upon the term of the lease agreement.

The maximum amount a landlord can charge for a security deposit in North Carolina applies to the following lease terms;

  • Week to week: two weeks rent
  • Month to month: one and one half month’s rent
  • Greater than month to month: two months rent

No matter how small, or great the amount you are authorized to charge for the security deposit in North Carolina, there must always be a proper accounting and deposit into a trust account.  See how many times we stress this, so it must be important.

Key Point 6:  When Does a Landlord Return the Security Deposit in North Carolina

In North Carolina, a landlord has 30 days to return the security deposit after the tenancy has been terminated, and the property has been returned to the possession of the landlord.  This 30 day requirement, however, is not set in stone.

If the landlord is unable to determine the extent of the damages to his property, or other matters for which the landlord may be required to retain all, or some, of the security deposit, North Carolina law allows an additional 30 days to compute damages.

In the event you need an additional 30 days, you must provide the tenant with an interim estimate of expenses no later than 30 days after the tenant vacates the property. The final accounting and notification to the tenant will occur at 60 days after the tenant vacated the property.

In the event the tenant’s forwarding address is not known, the landlord can apply the security deposit in North Carolina to the any authorized fees under the law.  The balance of the fees, however, must be kept in trust for the tenant for a period of 6 months.

It is also important to note that the landlord does not have a duty to provide the tenant with a receipt for the security deposit when the security deposit is provided to the landlord.  In practice, however, the amount of the security deposit should be included in your lease agreement, which will serve as a receipt.

Upon returning the security deposit, the landlords account should reflect any amount withheld, and, as stated above, this accounting should be provided to the tenant along with the remaining balance of the security deposit.

Key Point 7:  Is a Pet Deposit Considered the Same as a Security Deposit

A pet deposit and a security deposit are one in the same.  The same rules for a security deposit apply to a pet deposit.  As a practical matter, you must consider that, if you deducting money from the pet deposit, you must have evidence that the pet caused the damage.

In practice, it might be best to simply increase the amount of the security deposit to account for the pet.  Damage is damage, and not charging damage to a pet deposit alleviates your burden to prove the pet caused the damage to the property.

The only exception to this is if you have already charged the maximum allowable security deposit in North Carolina.  In that situation, you might be best served to charge the separate pet deposit.

A pet fee, on the other hand, is not refundable.  It is simply the amount a tenant pays for the convenience of you allowing the pet to live on the property.

Additionally, there is also pet rent.  Pet rent is the monthly rent the “pet” pays.  Similar to the pet fee, the pet rent is not refundable.

Key Point 8:  Landlord Transfer of Ownership and the Security Deposit in North Carolina

Upon transfer of ownership of the property, the landlord in North Carolina has certain obligations regarding the security deposit. The trigger event is not only a sale of the property, but any transferal of ownership, including the property owner’s death.

In accordance with the North Carolina Security Deposit Act, the landlord, or agent, or heirs, must either:

  • Transfer the security deposit, after lawful deductions, to the landlord’s successor in interest. After transfer, the tenant must be provided with the name and address of the transferee; or
  • Transfer the security deposit, or remaining portion, to the tenant.

It is important to note that if a landlord transfers the security deposit to another owner, the new owner now assumes the same responsibilities for the security deposit as the previous owner.  The same holds true for property owners who transfer security deposits to property management companies.

Key Point 9:  What Can a Tenant Do if a Landlord Does Not Follow North Carolina Security Deposit Law

The time frames to return the security deposit should be strictly adhered to.  While the landlord might not use the security deposit for unpermitted purposes, as a landlord, you must remember that the security deposit is the property of the tenant.

The North Carolina Security Deposit Act allows for a tenant to sue a landlord for a full accounting of the security deposit, as well as return of the security deposit.

Further, if you as a landlord are found to have willfully complied with the North Carolina Security Deposit Act laws concerning where to deposit the funds, notice to the tenant, and the return of the funds to the tenant, you could be ordered to forfeit the entirety of the security deposit.

Forfeiture is particularly problematic if you have damages that need to be assessed against the security deposit. Additionally, you may be ordered to pay the tenant for damages resulting from your noncompliance.

Linchpin Property Management is Here to Help

As you can see, security deposits in North Carolina go beyond merely collecting the deposit, and putting it somewhere safe.

As a landlord and property investor in North Carolina, you must stay up to date on the law concerning security deposits.  Failure to do so will have a negative impact on your cash flow.

If you have any questions about security deposits, please reach out to us.

As the only property management company in Fayetteville, North Carolina with a licensed North Carolina attorney, we are in a unique position to address any questions or concerns you may have.

Also, don’t forget to sign up for our FREE Property Management Academy, where we provide you with the best resources to make you a successful landlord and property investor.

The Team at Linchpin Property Management

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