Maryland Security Deposit Act Appellate Opinion

Last month, the Maryland Appellate Court involved an interesting landlord-tenant dispute involving the Maryland Security Deposit Act.

Security Deposit Law in Maryland

Before we get to the case, let’s talk about security deposits in Maryland. Security deposit laws in the state of Maryland play a crucial role in protecting the rights and interests of both landlords and tenants.

A security deposit is, as most of you understand, a sum of money paid by the tenant to the landlord upon signing a lease, which is held to ensure that the tenant complies with the terms of the lease agreement.

Collection of Security Deposits

In Maryland, the maximum amount a landlord can charge for a security deposit is equivalent to two months’ rent. This limit applies to all residential rental properties, regardless of the lease term or property type. When a landlord receives a security deposit, they are required by law to provide the tenant with a written receipt. This receipt must include information such as the amount of the security deposit, a description of the property being leased, the name and contact information of the landlord or their agent, and the date the security deposit was received.

Furthermore, landlords are required to hold security deposits in a separate, interest-bearing account in a financial institution located within the state of Maryland. This ensures that the security deposit remains protected and separate from the landlord’s personal assets.

Interest Accrual on Security Deposits

Maryland law mandates that interest be paid on security deposits held for at least six months. The interest rate is set annually by the Commissioner of Financial Regulation and must be paid to the tenant at the end of the tenancy or credited towards the rent, depending on the tenant’s preference.

Inspection and Deductions

Landlords must conduct a move-in inspection of the property within 15 days of the tenant’s occupancy. The purpose of this inspection is to document the property’s condition, including any pre-existing damages. The landlord and tenant should be present during the inspection, and the tenant should be given a written copy of the inspection report.

Upon the termination of the lease, the landlord should conduct a move-out inspection to determine if any damages or cleaning expenses need to be deducted from the security deposit. The tenant has the right to be present during this inspection, which should be scheduled within five days of the tenant vacating the property.

Landlords are allowed to make deductions from the security deposit for reasons such as unpaid rent or late fees, damages beyond normal wear and tear, and cleaning expenses if the tenant did not return the property in the same condition as when they moved in.

Return of Security Deposits

Landlords must return the security deposit, or any remaining balance after deductions, within 45 days after the tenant vacates the property. If the landlord withholds any portion of the security deposit, they must provide the tenant with a written list of the damages and the cost of repairing or replacing each item. Tenants have the right to dispute any deductions made by the landlord and may take legal action if they believe the deductions are unjustified.

Facts of Cerrato v. Garner

An Alabama family owned a property in West River, Maryland (Anne Arundel County).  They put their property in Maryland up for rent at a monthly rate of $2,900 via a real estate broker.  An open house was held by the broker’s listing agent, where two people expressed interest in the property. One offered to lease the property for a year at a monthly rate of $2,500, with the condition of paying the entire rent in advance.

The listing agent conveyed this offer to the owners, who accepted it. A standard Residential Lease Agreement was prepared for the property, signed by the owners for a one-year lease term. Rent payments were to be made in advance in monthly installments of $2,500, with a security deposit of $2,500. The tenant paid the first month’s rent and security deposit in full on July 31, 2019, and initiated a wire transfer for ten months’ rent on August 8, 2019. The tenant withheld one month’s rent due to a dispute over the property’s condition, including mold infestation, pool issues, and other alleged defects.

Four months after the tenant and his family moved into the property, he filed a lawsuit against the Garners in the District Court of Maryland for Anne Arundel County and requested a jury trial. The case was then transferred to the Circuit Court for Anne Arundel County. Mr. Ortiz alleged multiple claims, including that the Garners violated Maryland Code, Real Property § 8-203(b), prohibitingMaryland Code, Real Property § 8-203(b), which prohibits excessive security deposits (Count I). The circuit court ruled in favor of the Garners on cross-motions for summary judgment regarding Count I.

So let’s get this straight.  His idea was to pay the entire 12 months upfront, and then he sues him after he accepted?  I think we know who to root for here.

Issue on Appeal

The Maryland Appellate Division rephrased the issue the tenant raised?

Did the circuit court err in determining that a landlord does not violate Real Property § 8-203 by accepting a tenant’s unilateral offer to prepay rent?

Basically, the tenant argues that the advance payment of rent should be considered a security deposit because it secured the landlords against the risk of non-payment of rent. He contends that the landlords violated the statute by accepting an excess security deposit, as the payment exceeded the equivalent of two months’ rent.  Moreover, the tenant’s lawyers argued that RP § 8-203, called the Maryland Security Deposit Act, serves a remedial purpose, providing tenants with a legal solution not available under common law.

The tenant’s attorney pushed Maryland caselaw that found that due to this remedial nature of the statute, the “reasonable attorney’s fees” provision in § 8-203(e)(4) extends to “fees for post-judgment motions necessitated by the landlord’s refusal to satisfy the judgment.” Courts should not allow a restricted or stingy interpretation, this argument reasons,  to exemplify and perpetuate the very issues to be addressed.  Moreover, any ambiguity in § 8-203 should have been resolved in the plaintiff’s favor.

The landlords pushed back, arguing that it was in no way a security deposit. They centered their argument on the consensual aspect of the agreement between the parties involved.   The “it was your idea, not mine!” argument.

The tenant’s response is that no case law delves into the facts related to the § 8-203(b) claim.  So it might be that the involved parties in the previous case simply consented to paying an excessive security deposit. Do I like this argument?  I think it is creative. But ultimately, it is silly. The remedial purpose of the statute was to protect tenants from landlords.  That is just not what happened here, at least as to this issue.

Analysis

The tenant is trying to use the security deposit law to penalize the landlord because he was mad about many other things completely unrelated to the rent.

Real Prop. § 8-203(b)(1) makes it unlawful for a landlord to impose a security deposit over the equivalent of two months’ rent, and § 8-203(b)(2) permits a tenant to recover up to three times the amount of any excess security deposit charged by the landlord.  So there was real money in it for the tenant if he could make this claim stick.

In this case, the court found that the landlords did not impose or charge an excess security deposit on the tenant.  The tenant offered to pay the total rent in advance to secure a reduction in the monthly rent, and the landlords happily accepted his voluntary payment. The court concludes that the Garners did not violate Real Prop. § 8-203.  Accepting a tenant’s payment of rent in advance for all months except the last one does not violate the statute.  This is because the statute only holds landlords liable for imposing or charging a security deposit that exceeds two months’ rent. The Maryland legislature intentionally worded the statute this way to restrict liability to situations where landlords demand or require excessive security deposits. Merely accepting advance rent is not sufficient to trigger liability under the remedial statute, as per Md. Code Ann., Real Prop. § 8-203(b).