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Security Deposit as last payment

Our tenants are on a month to month basis now & followed procedure regarding movw out notice; however, they asked us to release a portion of their security deposit in order to place as a deposit on their new rental property. We stated that we normally do not release funds until 30 days after move-out date and after all pending accounts have been paid in full and closed, i.e. water, electrcity, etc.  Before any agreement was made, they contacted their out-of-state atty who told them that, in essence, we had the funds in escrow and they did not have to pay their final rent payment as contracted, but instead apply the initial security deposit to cover final payment.  The day after we were told to use the security deposit as final payment, we received notification of a past due water bill which they claim has been paid, but to date is still showing as past due.  We have never experienced this before, so wondering if you have any information as to how best to handle matter?

In colorado and most other states  "Security deposit" means any advance or deposit of money, regardless of its denomination, the primary function of which is to secure the performance of a rental agreement for residential premises or any part thereof. I have NEVER heard that any landlord is required to use it as rent. As a matter of fact many lease agreements, specify that it CANNOT be used as rent. Follow the procedures for the return of a security deposit in Colorado to a "T" and do not worry about this supposed "attorney".
I agree with Denise! There is almost always something that you need to use the deposit for. Youll regret paying it early! Just follow the rules and you will be fine.
Do what your lease states, mine say's specifically it cannot be used as a last months rent.
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