STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6326

December 16, 1985

MUNICIPALITIES:

Preemption of authority to adopt ordinance requiring landlord to pay interest upon security deposit of tenant

SECURITY DEPOSIT:

Interest upon security deposit of tenant

The Legislature has, through enactment of MCL 554.601 et seq; MSA 26.1138(1) et seq, preempted local units of government from requiring landlords to pay interest upon the security deposits of their tenants.

Honorable Perry Bullard

State Representative

The Capitol

Lansing, MI 48909

You have requested my opinion on the question of whether the Legislature, by virtue of MCL 554.601 et seq; MSA 26.1138(1) et seq, has preempted local units of government from requiring landlords to pay interest on their tenants' security deposits.

In People v Llewellyn, 401 Mich 314, 323-324; 257 NW2d 902 (1977), cert den, 435 US 1008; 98 S Ct 1879; 56 L Ed 2d 390 (1978), the Michigan Supreme Court identified four guidelines to be used in making the determination as to whether the state has preempted local units of government from a particular field of regulation. The court stated:

'First, where the state law expressly provides that the state's authority to regulate in a specified area of the law is to be exclusive, there is no doubt that municipal regulation is pre-empted. Noey v Saginaw, 271 Mich 595; 261 NW 88 (1935).

'Second, pre-emption of a field of regulation may be implied upon an examination of legislative history. Walsh v River Rouge, 385 Mich 623; 189 NW2d 318 (1971).

'Third, the pervasiveness of the state regulatory scheme may support a finding of pre-emption. Grand Haven v Grocer's Cooperative Dairy Co, 330 Mich 694, 702; 48 NW2d 362 (1951); In re Lane, 58 Cal 2d 99; 22 Cal Rptr 857; 372 P2d 897 (1962); Montgomery County Council v Montgomery Ass'n, Inc, 274 Md 52; 325 A2d 112, 333 A2d 596 (1975). While the pervasiveness of the state regulatory scheme is not generally sufficient by itself to infer pre-emption, it is a factor which should be considered as evidence of pre-emption.

'Fourth, the nature of the regulated subject matter may demand exclusive state regulation to achieve the uniformity necessary to serve the state's purpose or interest.' (Footnotes deleted.)

MCL 554.601 et seq; MSA 28.1138(1) et seq, was approved by the Governor on January 9, 1973 and became effective on April 1, 1973. The title of the Act provides that it is:

'AN ACT to regulate relationships between landlords and tenants relative to rental agreements for rental units; to regulate the payment, repayment, use and investment of security deposits; to provide for commencement and termination inventories of rental units; to provide for termination arrangements relative to rental units; to provide for legal remedies; and to provide penalties.' (Emphasis supplied.)

At the outset, preemption has not occurred here by virtue of guidelines one and four as set forth in Llewellyn. MCL 554.601 et seq; MSA 26.1138(1) et seq, contains no express provision stating that the authority of the state under this act was intended to be exclusive. Nor may it be said that the nature of landlord-tenant relations is a subject matter which demands 'exclusive state regulation to achieve the uniformity necessary to serve the state's purpose or interest.' Llewellyn, 401 Mich 324.

Turning to the third guideline described in Llewellyn, it does appear that the regulatory scheme established by MCL 554.601 et seq; MSA 26.1138(1) et seq, is fairly pervasive. As the Llewellyn court itself observed, 'the pervasiveness of the state regulatory scheme is not generally sufficient by itself to infer pre-emption, . . .' Llewellyn, 401 Mich 324. Nevertheless, when this factor is considered together with an examination of the legislative history of MCL 554.601 et seq; MSA 26.1138(1) et seq, it is indeed manifest that the Legislature did intent to preempt local units of government at least with respect to the imposition of interest payments upon tenants' security deposits.

MCL 554.601 et seq; MSA 26.1138(1) et seq, was introduced in the House on March 1, 1972 as HB 5978. 1 HJ 776 (1972). As first introduced, the bill contained the following relevant provisions:

'Sec. 5. The security deposit and any accrued interest shall be held in trust by the landlord and shall not be commingled with the landlord's own funds nor with the funds of any other person, firm or corporation. [Emphasis supplied.]

'. . ..

'Sec. 7. A landlord shall pay the prevailing rate of interest for trust funds or the prevailing rate of interest for savings accounts on security deposits. [Emphasis supplied.]

'Sec. 8. The interest on security deposits shall be used in 1 of the following ways:

'(a) Paid annually to the tenant.

'(b) Credited toward the payment of rent.

'(c) Paid to the tenant with return of the security deposit in accordance with the terms of this act.'

Thus, as originally introduced, HB 5978 clearly contemplated that landlords would be required to pay interest to their tenants on all security deposits.

Following its introduction before the House, HB 5978 was referred to the House Committee on Urban Affairs. 1 HJ 776 (1972). On May 18, 1972, that committee reported the bill favorably to the House but with a number of recommended amendments, including amendments to ss 5 and 7. 2 HJ 1829-1830 (1972). These amendments to ss 5 (Amendment 7) and 7 (Amendments) 8 and 9) were subsequently adopted on second reading by the House on May 19, 1972. 2 HJ 1850 (1972). As amended, these two sections read as follows:

'Sec. 5. The security deposit and any accrued interest shall be held in trust by the landlord and shall not be commingled with the landlord's own funds nor with the funds of any other person, firm or corporation. The security deposit and any accrued interest shall be deposited in a regulated financial institution in trust or in the name of the landlord. [Emphasis supplied.]

'. . ..

'Sec. 7. A landlord shall pay the actual rate of interest earned on the security deposit and accrued interest, and all risk of loss of principle shall be the risk of the landlord and not the tenant as pertains to the security deposit.' (Emphasis supplied.)

Section 8 of the Act remained unchanged.

The House amendments, thus, left intact and, indeed, arguably strengthened the provisions requiring landlords to pay interest upon security deposits. HB 5978 was passed by the House in this form and was forwarded to the Senate on May 24, 1972. 2 HJ 1902 (1972).

In the Senate, HB 5978 was referred to the Committee on State Affairs. 2 SJ 1255 (1972). That committee reported on December 11, 1972 presenting a substitute bill with a recommendation that the substitute be approved. 3 SJ 2147 (1972). Significantly, the provisions concerning the payment of interest contained in ss 5, 7 and 8 of the original house bill were entirely deleted. In their stead, the substitute bill contained the following provisions:

'Sec. 4. (1) The security deposit shall be held in trust by the landlord and shall be deposited in a regulated financial institution. A landlord may use the monies so deposited if he deposits with the secretary of state a cash bond or surety bond . . .. [Emphasis supplied.]

'. . ..

'Sec. 5. For the purposes of this act and any litigation arising thereunder, the security deposit is considered the lawful property of the tenant until the landlord establishes a right to the deposit or portions thereof.'

The Senate Substitute was referred to the Committee of the Whole, 3 SJ 2147 (1972), which, on December 14, 1972, reported favorably with recommended amendments. The Senate agreed to the substitute as amended. 3 SJ 2255-56 (1972). Among these amendments were the following amendments to ss 4 and 5 of the Senate Substitute to HB 5978:

'2. Amend page 4, line 8 [Sec. 4. (1)], after 'deposit' by striking out 'shall be held in trust by the landlord and'. [Emphasis supplied.]

'3. Amend page 4, line 11 [Sec. 4. (1)] after 'deposited', by inserting 'for any purposes he desires'.

'. . ..

'6. Amend page 5, line 4 [Sec. 5], after 'thereof' by inserting the following 'as long as the bond provision is fulfilled, the landlord may use this fund for any purposes he desires'.'

With the adoption of these amendments, ss 4 and 5 of the Senate Substitute to HB 5978 read, in pertinent part:

'Sec. 4. (1) The security deposit shall be deposited in a regulated financial institution. A landlord may use the monies so deposited for any purposes he desires if he deposits with the secretary of state a cash bond or surety bond . . .. [Emphasis supplied.]

'. . ..

'Sec. 5. For the purposes of the act and any litigation arising thereunder, the security deposit is considered the lawful property of the tenant until the landlord establishes a right to the deposit or portions thereof as long as the bond provision is fulfilled, the landlord may use this fund for any purposes he desires.' [Emphasis supplied.]

These portions of ss 4 and 5 remained unchanged when the full Senate subsequently passed the Senate Substitute to HB 5978 on December 15, 1972 and returned it to the House. 3 SJ 2272 (1972). The House concurred in the Substitute and the bill was, accordingly, presented to the Governor for his approval. 4 HJ 3346, 3384 (1972).

Given this legislative history, it must be concluded that the Legislature intended to preempt local units of government from requiring landlords to pay interest upon their tenants' security deposits.

As originally introduced, HB 5978 plainly would have required the payment of interest on such deposits. The Senate, however, with the House concurring, deleted this requirement from the bill prior to passage. Had the Legislature stopped here, it might have been possible to conclude that the Legislature merely intended to leave this issue open and subject to local determination. As the foregoing legislative history demonstrates, however, the Legislature also deleted language which would have required security deposits to 'be held in trust by the landlord.' (Senate Substitute to HB 5978, s 4(1), as first introduced.) Even more significantly, the Legislature added language in both ss 4 and 5 of the bill expressly authorizing a landlord, upon posting of the requisite bond, to use such security deposits 'for any purposes he desires.' The sole precondition imposed by the Legislature on such use of security deposits by landlords was the requirement that the landlord must first deposit a cash or surety bond with the Secretary of State. Indeed, s 5, as enacted, provides that 'as long as the bond provision is fulfilled, the landlord may use this fund for any purposes he desires.' This language clearly indicates the Legislature's intent that no other precondition, including a condition requiring the payment of interest, was to be imposed upon a landlord's use of such deposits and preempts local units of government from imposing such conditions or requirements.

I am constrained to conclude and it is my opinion, that the Legislature has, through enactment of MCL 554.601 et seq; MSA 26.1138(1) et seq, preempted local units of government from requiring landlords to pay interest upon security deposits of their tenants.

Frank J. Kelley

Attorney General