Am I liable to return the security deposit to a tenant if I was working with a property management company and the company closed shop?

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Am I liable to return the security deposit to a tenant if I was working with a property management company and the company closed shop?

I hired a property management company to manage and rent out an investment property. The management company closed and took all security deposits and management fees with them. They have completely disappeared. My tenant is now moving out. Am I, as the owner of the property, liable for the secuirty deposit even though it was held by the property management company?

Asked on April 30, 2012 under Real Estate Law, Illinois

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

Yes, you are liable to return all security deposits; the property manager was your agent, and you are therefore legally responsible for its actions done in the course of its employment (such as what it did with tenant security deposits)--that is in addition to the fact the law specifically makes the property owner responsible for tenant security deposits. You, of course, would have the right to sue the management company to recover the money from them, though this might be effectively impossible if the company has closed and has no assets or income. You may be able to sue the business's owners, if it was not a corporation or LLC; you may also be able to sue the owners or key employees regardless of the structure of the management company if you can show that keeping the deposits was a criminal act (i.e. done with criminal intent).

Note that you may also be able to get some tax advantage from any losses you incur due to having to pay out of your pocket the security deposits--you should discuss this with your tax preparer.


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