Q: Can a PM withhold rent to fill escrow and make repairs?

Can a property manager withhold a tenants rent money to fill escrow back up and pay repairs without giving the landlords their mortgage money?

- Louisville, Kentucky

The general rule, of course, is to consult state law on what’s required – and then the contract on what the two parties actually agreed on between yourselves. You’re the expert on your contract, of course – you have that document sitting in front of you. So we’ll focus on the law. Since you gave us a Kentucky zip code, that’s where we’ll look.

The relevant code is Kentucky 324.11, which you can access here.

What are the property manager’s requirements under the law? 

1. The manager must maintain an escrow account and deposit funds received in it without unreasonable delay.
2. The property manager cannot withdraw any deposits in the account except by mutual agreement, contract termination, a court order, or certain other circumstances which you do not mention. I’m therefore assuming they don’t apply.

There is no minimum required escrow level specified in Kentucky state law.

Now, if you aren’t getting the rental proceeds you expected from the management company, it could be because the tenant has withheld it.

See, Kentucky allows tenants to withhold up to 50 percent of the monthly rental amount – or $100, whichever is greater – if there is a maintenance issue with the dwelling that affects the health and safety of the residents and the landlord doesn’t make timely repairs to preserve the basic habitability of the unit. See KRS 383.635.

Under this provision, the tenant has to provide the landlord, in writing, an itemized list of the repairs to be made that affect the health and safety of the occupant(s). The landlord has 14 days to respond and make those repairs.

It is possible that you haven’t seen the correspondence from the tenant because it went to the property owner rather than you, or it’s in an envelope you just haven’t opened. Or the tenant or manager could simply have screwed up and failed to communicate effectively.

It could also be that your property manager went ahead and made the repair out of the funds you had on deposit with them, in accordance with your property management agreement.

While contracts do differ, it is pretty standard for landlords to authorize repairs up to a specific dollar amount without a specific, separate authorization in the contract. Landlords do this in order to keep things moving without having their phone ring every other day with some trivial request that should be a no-brainer! (You don’t want your phone to ring for approval every time the manager changes a light bulb, do you?).

If this is the case, your property manager is likely well within their rights to hold back the money required to make a repair, provided it is under the dollar amount threshold you specified in your contract that they could spend for repairs and maintenance without your approval.

Here’s a good example: This sample contract was approved by the Kentucky Real Estate Commission. If your contract followed this form, then you can see what you authorized the management company to deduct in Paragraph 5:

The Owner authorizes the Agent to deduct from the rental and other receipts, retained in the Trust Account [referred to in 3(c], all undisputed commissions and other compensation of the Agent earned under Paragraph 7 of this agreement and all costs, repairs and expenses authorized under Paragraph 4(a)-(d) of this agreement, subject to restriction contained in 5(a) and (b) below.

Paragraph 4 refers to repairs preauthorized by the landlord.

Note, too, that we’re talking rent money, not security deposit money – which should be in a separate account somewhere, though not necessarily held in escrow. See here for Kentucky’s rules concerning security deposits.

On the other hand, if none of the above applies, and the amount in question for repairs exceeds the amount you have preauthorized in your contract or standing operating agreement with the property management firm, it is possible your manager is acting in breach of your contract. If such is the case, we would refer you to an attorney, if you can’t get things settled satisfactorily by engaging your property management firm directly.

Hope that helps!