Trust Accounts and the Principal Broker's Exposure in Property Management

Property management money moves every month. Rents come in, owner draws go out, repair invoices get paid, and security deposits sit for the length of a lease. Each of those movements is a chance for the bank balance and the records to stop matching.

I look at this from both sides. As managing broker of a brokerage and property management company, I work under these trust-account rules myself. As a lawyer, I advise on what happens when the records cannot explain where the money went.

Managing property for others is brokerage

Tennessee's definition of a broker includes negotiating leases and collecting rents for others for a fee (Tenn. Code Ann. §§ 62-13-102 and -103). Doing that without a license is unlawful unless an exemption applies (§ 62-13-301).

The exemptions in § 62-13-104 are narrower than many people assume. They cover an owner acting on the owner's own property, an attorney-in-fact under a recorded power of attorney, and an attorney acting as an attorney. They also cover a resident manager employed by a broker or the owner, whose duties are limited to supervision, showing residential units, leasing, and collecting deposits and rents. That resident manager may not negotiate rents, security deposits, or leases.

What counts as trust money

TREC Rule 1260-02-.09 defines trust money to include money a licensee holds as the temporary custodian of funds belonging to others. Rents collected for an owner and deposits held for a tenant fit comfortably within that definition. The rule then sets out how that money must be handled:

• The principal broker must maintain a separate escrow or trustee account for trust money.
• Affiliate brokers must turn trust money over to the principal broker immediately upon receipt.
• The principal broker is responsible at all times for trust money accepted by the principal broker or the firm's affiliates.
• Trust money relating to the lease of property must be held in one or more escrow or trustee accounts separate from the firm's general escrow account.
• Commingling, meaning holding others' funds in an account that contains personal or business funds, is expressly prohibited.
• Trust money must be disbursed properly and without unreasonable delay.

Interest-bearing trust accounts are allowed but not required. If one is used, the payor must be told at the start, there must be a written agreement on what happens to the interest, and the interest has to be tracked for each deposit.

Tennessee law also requires brokers to keep records for at least three years showing the depositor, the date of deposit, the date of withdrawal, the payee, and other information the Commission may require (Tenn. Code Ann. § 62-13-321).

Security deposits have a second set of rules

In counties where Tennessee's Uniform Residential Landlord and Tenant Act applies, which the statute limits by county population, security deposits carry their own requirements under Tenn. Code Ann. § 66-28-301. The deposit must be kept in an account used only for that purpose at a regulated bank or lending institution, and the tenant must be told where the account is located when the lease is signed. The statute also sets move-out inspection and itemization procedures. A landlord who fails to use a separate account and also fails to provide the required damage listing is not entitled to keep any part of the deposit.

The act's definition of "landlord" expressly includes a manager who fails to make the ownership and management disclosures it requires (§ 66-28-104). The TREC rule on separate lease trust accounts applies to lease money the firm holds either way.

How the exposure stacks up

On the licensing side, Tenn. Code Ann. § 62-13-312 lists grounds for discipline that apply directly here. They include failing to account for or remit money belonging to others within a reasonable time, and violating TREC's rules, which is how commingling reaches discipline. They also include failing to adequately supervise affiliate brokers and improper or dishonest dealing. A principal broker cannot hand that responsibility to a bookkeeper or a property manager. The rule says the principal broker is responsible at all times.

On the civil side, the same facts can support an owner's claim that rents or reserves were not properly accounted for, or a tenant's claim for a deposit. The licensing review and the civil claim are separate tracks, but they read the same ledger. When a broker complaint turns into a records problem covers how that tends to unfold.

Audits are not hypothetical

TREC resumed firm audits in March 2024, reported completing more than 100 audits that year, and has listed commingling of funds among the audit findings. Tennessee law allows the Commission to examine books and accounts relevant to whether escrow funds were properly maintained and disbursed, and refusing access is itself a ground for suspension or revocation (§ 62-13-312). TREC's rules allow civil penalties of up to $1,000 for each separate violation, and each day a violation continues may count as a separate violation (Rule 1260-02-.32).

What a defensible setup looks like

None of this requires anything exotic. It takes the right accounts, opened in the right names, with general escrow and lease trust money kept apart and nothing passing through operating funds. It takes a ledger that ties each deposit and withdrawal to a specific owner or tenant and a regular reconciliation against the bank statements. It also takes a file the firm can produce on short notice. For firms that keep records electronically, TREC's rules require them to be accessible in an organized format within 24 hours of a Commission request for inspection.

The answer for any particular firm turns on its accounts, its management agreements, and the transactions involved. If a trust-account question, complaint, or audit request is on your desk, I can work through the records and the exposure with you.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal advice for any specific firm, account, complaint, or dispute.