Pass on Security Deposit to Next Tenants?

[Christopher D.]

I have a 3 bdrm/3bth condo currently rented out by 3 tenants, who have lived there for two years.  Their lease is ONE lease, co-signed by the three of them (NOT split up into separate leases).  Their lease is up at the end of this month.  2 of the 3 tenants are moving and the 3rd would like to stay, with two new room-mates.

What do you recommend?

Option 1: I refund the security deposit to all three tenants, inspect and fix up the property with the 1 tenant still living there, then take a new deposit from the 1 old tenant and 2 new tenants.

Option 2: No fix-up/turn-over.  Have the 2 new tenants come to their own agreement with the 2 old tenants on how much of the security deposit the new tenants will refund to the old tenants.  Get 2 old tenants to sign a form forfeiting reimbursement of security deposit from landlord.  New tenants sign a form accepting the property "as is."

Interested to read your feedback on this.  Option 2 seems easier, but don't want to get sued, or piss off the old tenants, and have them trash the place!

Not sure if this matters, but all three old tenants are professionals with good credit - I only mention this because it is in their best interest to keep good records as a tenant.  In other words, I don't expect them to do anything vindictive to the property that could negatively affect their ability to rent in the future.