Do I have to return deposit if tenant did not sign lease?

Question

So the tenant (Section 8) wanted to rent my property. Gave a double deposit, had Section 8 do the inspection and passed, but the day after it passes tells my agent that the husband found a job in another area 2 hours away and no longer wants to rent the house. My agent said they didn't sign the lease agreement because they weren't actually moving in yet. Now they are requesting the full deposit back. Am I obligated to return it to them? The listing wasn't pulled, but we did turn away prospective tenants (for about a month) since we thought they were going to lease it. The deposit was for $3600 (2 months). Any help will greatly be appreciated.

Ronald Rohde · Answer

So the potential tenant gave you money without anything in writing? memo line on check? Do you want legal advice or ethical advice?

Kyle J. · Answer

The reality is you're going to have to return it.  You'd be hard pressed to be allowed to keep it even if you had something in writing since you called it a security deposit.  (Security deposits are usually refundable.)  Without something in writing, I'd say there's no chance you'd be allowed to keep it since they never signed the lease and never moved in.

Next time, don't take the property off the market or stop trying to rent it with such an informal agreement.  What I do is, if it's going to be a while before the new tenant can move in, is have them sign a rental holding agreement and pay a non-refundable holding fee that later converts to their security deposit only after they sign the lease, pay the first month rent, and start all utilities in their name.  If they don't do those things or later change their mind, they forfeit the entire holding fee.

One last thought, since you had an agent helping you with this transaction, I'd question if your agent even knows what they're doing.  At a minimum, I'd have a chat with him/her about how to do things better in the future so this doesn't happen again.

Barry Ingram · Answer

I'm not sure about Texas real estate law, but on our property Virginia we would have to give the deposit back because it was just that, a deposit against any damage/repairs. So we changed and started asking for the first month's rent upfront and pay the deposit when they move in. That way if they cancelled out, the would not have an expectation of getting the money back because it's prepaid rent.

I know in some cases landlords would keep the deposit and force the tenant to take them to court, etc. But I'd not advise that route.

Either way, I'm not a real estate lawyer, just my 2 cents.

Barry

Michael Dang · Answer

Return the money.  You have no lease agreement.  Lesson learned here is to only take a deposit when the lease agreement is signed.  I always do this now.  I state upfront and in the lease agreement that cancellation of the lease agreement the deposit is forfeited.

Andrew B. · Answer

This is why you should have prospective applicants sign an agreement to hold before you assume they want it. Without anything in writing that specifies what happens if they decide not to move in, you likely have no recourse. Its their money, so you should return it.

Tony Castronovo · Answer

Good lessons and insights here. I have an apartment complex in a college town that I picked up late last year. No surprise, we are getting a lot of folks wanting to pre-lease for August. At 4 months out I figured I’d want to make sure to have a non-refundable deposit as the demand is high for units with that move-in date. I like the “holding fee” approach that @Kyle J. suggests.

Brian Garlington · Answer

@Tuan Vu

If the shoe was on the other foot I am most certain you would be demanding your money back....and if you decided to let them take you to court you would look absolutely foolish trying to tell that story to the judge, even if it is 100% factual.

As an FYI, I'm going through the same scenario right now, had a Section 8 tenant that gave a deposit, yes it was in writing....10 days later she says she changed her mind because she needs the money to get braces for her canary or whatever....From a Kharma standpoint AND from an ethical standpoint I'm giving the money back. Why would I want to have someone mad at me, that also knows exactly where my vacant unit is?

If the tenant is on Section 8, just re run the ad on Go Section8 and simply call or text back the others that called....tell them the tenant just found out about a job two hours away, so now the property is available? It should be filled in no time man.

Courtney King · Answer

I agree with multiple people here. Their Section 8 which means that they are likely strapped for cash. It's wise to do the right thing and keep it moving.

Patti Robertson · Answer

@Tuan Vu - HUD does not allow a SEC 8 tenant to pay the deposit before the lease is signed, and HUD does not allow the lease to be signed until the property passes inspection. That said, some states, including mine - VA, thankfully, allow a landlord to charge a tenant a "reservation fee" for pulling the house of the market.  Our landlord tenant act specifically defines this process. We have a SEC 8 tenant pay an lease reservation fee if they want us to stop accepting application at the time they turn in their paperwork.  That receipt clearly state that if the tenant fails to rent the property, due to no cause of the landlord, the tenant forfeits the reservation fee up to the amount of loss incurred by the landlord. So in my case, if we had this signed, the landlord would be able to keep the deposit, up to any loss.

Chalk this one up to an expensive lesson learned and give the money back.

Jerel Ehlert · Answer

Seen this exact question on facebook (by a different "person"), and I'll say here what I said there: Don't be that guy (or gal).

BS like this is how you get legislators to write statutes regulating your activity.  This is also how you get on the prohibited list of landlords.  Section 8 can also sue you.  But let's walk through the analysis:

Deposit is to cover damage other than "wear and tear".  They never took possession, so no possibility of damage.

You never took the property off the listing, so no possibility you missed another opportunity to lease the property.

How do you prove you were harmed?

I'll go out on a limb and say that any landlord that pulls this kind of unethical behavior has no business owning property.

Do I have to return deposit if tenant did not sign lease?

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