Q: How do security deposits get returned after switching PMs?

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Q: How do security deposits get returned after switching PMs?

Q: How do security deposits get returned after switching PMs?

First, when an owner no longer wishes to do business with a property management company the security deposits being held by the management company must be returned to whom? The owner or the tenant?  Second, is there a law that states that when the security deposit is returned to the owner both the owners name and the tenants name must be on the check and the wording “and/or” cannot be used.

–Lawton, OklahomaReturning Security Deposits

answer-icon-masterWhen you change over a property management company in Oklahoma, you shouldn’t have to worry about physical checks for a security deposit at all.

This is because Oklahoma is one of two states that requires security deposits to be held in an escrow account – the other being Pennsylvania. For more details, let’s take a look at the relevant Oklahoma statute:

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Section 115: Any damage or security deposit required by a landlord of a tenant must be kept in an escrow account for the tenant, which account shall be maintained in the State of Oklahoma with a federally-insured financial institution.

So if it’s in an escrow account, all that has to happen is the outgoing property management firm relinquishes control of the escrow account to the new firm, or back to the landlord.

It shouldn’t be going back to a tenant, unless the property manager has already determined that the tenant is entitled to the refund – for example a tenant has already moved out and the move-out inspection is already done. 

The key, ultimately, lies in your written agreement with your property manager. The contract should specify what happens to security deposits held in escrow when management responsibility switches over.

If the outgoing management firm did not live up to their contractual responsibilities, and you as a landlord suffered damages as a result, you may need to sue the old firm to recover them, if your contract allows for it. Some contracts disallow the option of suing for damages, however, instead requiring you to go to mediation or arbitration. 

As for the unusual “and/or” language on the check, that’s not a big deal by itself. Had the language said “landlord OR tenant’s name,” or something to that effect that could cause you a problem. But as long as you as the landlord are in physical possession of the check, you should be fine. 

What you are looking at is a bookkeeping control technique that is occasionally used when there are multiple potential payees. And yes, it’s legal, under the Uniform Commercial Code, Section 3-110(d) (pretty much adopted by all 50 states), as long as it satisfies your contractual agreement with the property manager.

Here’s how it works: If the check signer, the payor, wants both parties to be fully aware of the check and that it was deposited (or endorsed to someone else), he or she would write “AND” between the two names. That’s a signal to the bank that the check should be endorsed by both payees prior to deposit. But since the property manager wrote “and/or,” that means that either payee can endorse and cash or deposit without the approval of the other. 

If you wanted to refund someone’s deposit, then, you could simply hand the check with the tenant’s name alongside yours to the tenant. I wouldn’t do that though, unless I had full access to the account, because otherwise I would not be able to prove that I had handed that deposit money over. 

At any rate, assuming there’s no dispute over the amount the property manager handed over to you, and that you have physical possession of the checks, there should not be much of a problem. You can deposit those checks into a new escrow account within Oklahoma with no trouble, and therefore stay within compliance of Section 115, linked to above. 

Don’t commingle the funds with your own, however, or deposit them out of state. And don’t spend the money! To do so other than to compensate yourself for unpaid rent and legitimate repairs in accordance with the law would be a misdemeanor, punishable by up to six months in jail, under the same statute. 

Author Bio
Writing about personal finance and investments since 1999, started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.
Author Bio for Jason Van Steenwyk

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