You have decided to become a residential property landlord. One of the initial steps is to figure out what amount to charge for a security deposit. As an attorney, I have seen a variety of security deposit amounts, so there is no “exact” security deposit to charge. Michigan law, though, places constraints on security deposits for residential properties. Security deposits, and other fees and charges, can be tricky territory for landlords. Below, some basics on security deposits and other fees are laid out
By law, Michigan limits the amount a landlord can charge a tenant for the security deposit. MCL 554.602 prohibits a security deposit that exceeds 1.5 times the monthly rent. So, if the monthly rent for the property is $1,000 per month, the security deposit cannot exceed $1,500. Additionally, Michigan law limits the deductions the landlord may take from a tenant’s security deposit to two things:
(a) Reimburse the landlord for actual damages to the rental unit or any ancillary facility that are the direct result of conduct not reasonably expected in the normal course of habitation of a dwelling.
Thus, deductions can only be used for damage beyond normal wear and tear, and for unpaid rent and utility bills. Painting a property in between tenants, for example, is considered normal wear and tear in most cases, and thus a landlord cannot deduct for the costs of repainting. Any damage the landlord claims that are in excess of the security deposit require going to court.
Cleaning Fees and Other Sources of Protection
Landlords can feel constrained by the security deposit limitation to 1.5 times monthly rent. There are other ways a landlord can protect their property from damage. Most of these fall within a category called a “non-refundable fee.” One common example of this is a non-refundable cleaning fee. This is a fee, separate from the security deposit (since it is non-refundable, discussed below) to reimburse the landlord for cleaning the property once a tenant vacates. Another common fee is a non-refundable pet fee which reimburses the landlord for additional damages caused to the property by a pet, such as a dog urinating on the carpet. An important caveat here is that these non-refundable fees must be “reasonable.” What constitutes a reasonable fee is not defined, but some common sense applies. If the same property above rents for $1,000, a non-refundable cleaning fee of $1,000 would likely not be reasonable. On the other hand, a non-refundable cleaning fee of $200 is likely reasonable.
The most important element of charging fees is the difference between refundable and non-refundable fees. Refundable fees are considered, by definition, to be security deposits, and thus fall victim to the Michigan law limiting security deposits to 1.5 times monthly rent. Thus, in the same $1,000 per month rental, if the landlord charges a security deposit of $1,500 (1.5 times monthly rent) plus a refundable cleaning fee of $250, the landlord has violated the Michigan law limiting security deposits to 1.5 times monthly rent by $250.
Non-refundable fees, on the other hand, are not considered security deposits. Non-refundable fees can be asses for many things and for many reasons. As a landlord myself, I charge a non-refundable pet fee in the $200-250 range, depending on the size of the property and the animal itself. In the same example above, if the $250 cleaning fee is non-refundable, the landlord has not violated Michigan law since the security deposit is proper (1.5 times monthly rent), and the cleaning fee is non-refundable, and thus not considered a security deposit.
There is a careful balancing act between protecting the landlord and his/her property, and finding quality tenants. A landlord requesting a maximum security deposit, followed by a laundry list of non-refundable fees is likely to scare of prospective tenants. On the other hand, a landlord that undercharges on the security deposit and has no non-refundable fees may be setting himself or herself up for uncovered damages to the property and the possibility of a court fight.
The above is meant only as a primer on security deposits and fees, and not meant to be an exhaustive discussion. If you are planning to become a landlord, or already are a landlord, with questions, please contact contact Benjamin Long of Schmidt & Long.