If you are a residential investment property owner, chances are you get a security deposit from a potential tenant at the beginning of a new rental relationship. Obviously, you should. Things happen. People leave with past due rent, property gets damages, etc. Requiring security deposits is not without its obligations on the landlord.

Tennessee Code Annotated 66-28-301 of the Uniform Residential Landlord Tenant Act spells out a very specific set of rules when it comes to security deposits.

First, if you take a security deposit on residential property, you, as the property owner or property manager, are required to deposit all of the tenants’ security deposits in an account used only for the purpose of holding security deposits in a bank or other lending institution subject to regulation by the state or any agency of the US government. What does this mean in layman’s terms? You can’t just deposit the money in your checking or operating account. You should have an account that is designated for holding security deposits.

You also must notify the tenant at the time he or she signs the lease and submits the security deposit the location of the account (what bank it’s in), but you do not have to give the account number. It’s a good practice to state in the lease agreement the name and location of the institution where the security deposit is held to comply with this requirement.

The statute goes on to explain that except is certain situations that will be discussed below, the tenant has the right to inspect the premises to determine the tenant’s liability for physical damages that are the basis for any charge against the security deposit.

An inspection of the premises to determine the tenant’s liability and the landlord’s estimated costs to repair such damage must be conducted in the following manner:

Upon request by the landlord for a tenant to vacate or within five (5) days after receipt by the landlord of written notice of the tenant’s intent to vacate, the landlord may provide notice to the tenant of the tenant’s right to be present at the inspection of the premises. Such notice may advise the tenant that the tenant may request a time of inspection to be set by the landlord during normal working hours.

The landlord may require the inspection to be after the tenant has completely vacated the premises and is ready to surrender possession and return all means of access to the entire premises; provided, that the inspection shall be either on the day the tenant completely vacates the premises or within four (4) calendar days of the tenant vacating the premises.

If the landlord provides written notice of the tenant’s right to be present at the landlord’s inspection and the tenant schedules an inspection, but fails to attend such inspection, the tenant waives the right to contest any damages found by the landlord as a result of such inspection by the landlord; provided, that notice of the tenant’s waiver upon such circumstances is set out in the rental agreement.

If a tenant requests a mutual inspection as provided above, the landlord and tenant shall then inspect the premises and compile a comprehensive listing of any presently ascertainable damage to the unit that is the basis for any charge against the security deposit and the estimated dollar cost of repairing the damage. The landlord and tenant shall sign the listing. The signatures of the landlord and the tenant on the listing shall be conclusive evidence of the accuracy of the listing.

If the tenant refuses to sign the listing, the tenant shall state specifically in writing the items on the list to which the tenant dissents. This provision does not preclude a landlord from recovering the costs of any other contractual damages to which the landlord may be entitled, including the costs of any additional physical damage to the premises that is discovered after the inspection has been completed, provided that the landlord can only recover the additional costs if they are discovered by the landlord prior to the earlier of thirty (30) days after the tenant vacated or abandoned the premises or seven (7) days after a new tenant takes possession of the premises.

The tenant shall not have a right to inspect the premises if the tenant has:

• Vacated the rental premises without giving written notice
• Abandoned the premises
• Been judicially removed from the premises
• Not contacted the landlord after the landlord’s notice of right to mutual inspection of the premises
• Failed to appear at the arranged time of inspection as described above
• If the tenant has not requested a mutual inspection or is otherwise inaccessible to the landlord.

If one of the preceding situations occur, the landlord may inspect the premises and compile a comprehensive listing of any presently ascertainable damage to the unit that is the basis for any charge against the security deposit and the estimated dollar cost of repairing the damage without providing the tenant an opportunity to inspect the premises; provided, that the landlord provides a written copy, sent by certificate of mailing to the tenant, of the listing of any damages and estimated cost of repairs to the tenant upon the tenant’s written request.

If a tenant disputes a final damage listing, the tenant may bring an action in circuit or general sessions court, but the tenant’s claim will be limited to those items from which the tenant specifically dissented as stated above.

Of course, the statute also states that if the tenant leaves with unpaid rent, the landlord may remove the deposit from the account and apply it to the rent.

So, what happens if you do not follow these steps? The statute also says that “no landlord shall be entitled to retain ANY portion of a security deposit if the security deposit was not deposited in a separate account and a listing of damages is not provided” as required by statute.

If a tenant leaves the property not owing rent and having any refund due, the landlord must send notification to the last known or a reasonably determinable address, of the amount of the refund due the tenant. If the tenant does not pick up the deposit or respond to the notice, then the landlord “may remove the deposit from the account and retain it free from any claim of the tenant or any person claiming in the tenant’s behalf.

Keep in mind, the Uniform Residential Landlord Tenant Act does not apply to all counties in Tennessee, only the larger counties. If you are not sure if your county qualifies, please talk to an attorney. We’re people too, just crankier. I am in Madison County and URLTA applies.