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self-study / Real Estate

Security deposits

David Greene

Partner, Dignity Law Group, APC

Joseph Kellener

Partner, Dignity Law Group, APC

Security deposits are the most common fight we encounter between landlord and tenant -- and the bigger the deposit, the bigger the fight. Security deposits are quite common, but to be certain, a security deposit is an odd duck. Legally, a security deposit is extra money given to the landlord by the tenant to secure against the landlord's losses in the event something is damaged or destroyed during the tenant's possession.

"Security deposit" is defined by Civil Code Section 1950.5 as follows (all statutory references hereafter are to the Civil Code unless otherwise noted): "any payment, fee, deposit, or charge, including, but not limited to, any payment, fee, deposit, or charge ... that is imposed at the beginning of the tenancy to be used to reimburse the landlord for costs associated with processing a new tenant or that is imposed as an advance payment of rent, used or to be used for any purpose, including, but not limited to, any of the following: (1) The compensation of a landlord for a tenant's default in the payment of rent. (2) The repair of damages to the premises, exclusive of ordinary wear and tear, caused by the tenant .... (3) The cleaning of the premises upon termination of the tenancy .... (4) To remedy future defaults by the tenant in any obligation under the rental agreement to restore, replace, or return personal property or appurtenances, exclusive of ordinary wear and tear, if the security deposit is authorized to be applied thereto by the rental agreement. .... (c) ... a landlord may not demand or receive security, however denominated, in an amount or value in excess of an amount equal to two months' rent, in the case of unfurnished residential property ... in addition to any rent for the first month paid on or before initial occupancy. .... (e) The landlord may claim of the security only those amounts as are reasonably necessary for the purposes specified in subdivision (b). .... (g)(1) No later than 21 calendar days after the tenant has vacated the premises ... the landlord shall furnish the tenant, by personal delivery or by first-class mail, postage prepaid, a copy of an itemized statement indicating the basis for, and the amount of, any security received and the disposition of the security, and shall return any remaining portion of the security to the tenant. .... ( l) The bad faith claim or retention by a landlord or the landlord's successors in interest of the security ... , or the bad faith demand of replacement security ... may subject the landlord or the landlord's successors in interest to statutory damages of up to twice the amount of the security, in addition to actual damages. .... (m) No lease or rental agreement shall contain any provision characterizing any security as 'nonrefundable.'"

The language of Section 1950.5 gives a bit of latitude in terms of how much a landlord can demand or collect but be mindful that this is further limited by statute and by local rent control regulations. For example: In Los Angeles, when the tenant takes on the property, a landlord may collect the first month's rent (Section 1950.5(c)(1)) and, up to two- or three-months' equivalent of advanced rent may be collected depending on whether the unit is furnished or unfurnished. For an unfurnished unit, a maximum two months' rent as security is allowed. For a furnished unit, up to three months' advanced rent may be collected as security. Id.

Granberry v. Islay Investments, 9 Cal. 4th 738 (1995), stands, in part, for the right of a landlord to raise a right of setoff when deducting then-due unpaid rent from the security deposit absent express contractual language. However, the California Supreme Court held that such a setoff requires a finding of fact. In Granberry, the landlord failed to comply with the procedures in Section 1950.5. Despite this failure, our Supreme Court held the mere fact that the landlord had lost the right to take advantage of the "summary deduct-and-retain procedure" provided by Section 1950.5 "does not lead to the conclusion that he has lost all right to claim damages for unpaid rent, repair, and cleaning, whether through setoff or otherwise."

As is apparent from the language, Section 1950.5 "was enacted to ensure the speedy return of security deposits on the termination of tenancy and to prevent the improper retention of such deposits." "Section 1950.5 by its own terms is limited to the disposition of security deposits. Nothing in its language suggests it is intended to be the sole and exclusive remedy for any dispute regarding the landlord-tenant relationship, or to preclude landlords or tenants from bringing claims unrelated to the security deposit, once a lease concludes." Sweeney v. Scully, B284915 (Cal. Ct. App. Jun. 27, 2019) (citing Korens v. R.W. Zukin Corp., 212 Cal. App. 3d 1054 (1989)).

Different amounts a landlord may collect as security apply when a service member is renting, depending on whether the unit is furnished or unfurnished (Section 1950.5(c)(2)), and his or her history. Section 1950.5(c)(2)(A). "Service member" is defined under California Code Military and Veterans Code Section 400 as: "A member of the militia ... called or ordered into active state or federal service pursuant to Section 143 or 146 or federal law" and/or "A member of an active or reserve component of the Armed Forces who is ordered into active duty pursuant to federal law." ("The militia of the State shall consist of the National Guard, State Guard and the Naval Militia -- which constitute the active militia -- and the unorganized militia." Cal. Mil. & Vet. Code Section 120.)

Unlike rent, which belongs to the landlord, a security deposit is, and remains, the tenant's property unless and until effectively used to remedy a tenant's rent default and/or to appropriately compensate the landlord. Thus, any and all amounts paid as "security" that remain after the landlord makes deductions are the tenant's property and must, in most circumstances, be returned to the tenant within 21 days. Section 1950.5(g)(1).

The obligation for the return of the deposit is a personal liability of the landlord to the tenant and no other person can make any claim to the deposits held by the landlord. Technically, "no later than 21 calendar days after the tenant has vacated the premises, but not earlier than the time that either the landlord or the tenant provides a notice to terminate the tenancy under Section 1946 or 1946.1, Section 1161 of the Code of Civil Procedure, or not earlier than 60 calendar days prior to the expiration of a fixed-term lease, the landlord shall furnish the tenant, by personal delivery or by first-class mail, postage prepaid, a copy of an itemized statement indicating the basis for, and the amount of, any security received and the disposition of the security, and shall return any remaining portion of the security to the tenant. After either the landlord or the tenant provides notice to terminate the tenancy, the landlord and tenant may mutually agree to have the landlord deposit any remaining portion of the security deposit electronically to a bank account or other financial institution designated by the tenant. After either the landlord or the tenant provides notice to terminate the tenancy, the landlord and the tenant may also agree to have the landlord provide a copy of the itemized statement along with the copies required by [the code] to an email account provided by the tenant." Id.

In 2021, in response to COVID, the COVID-19 Tenant Relief Act passes, and is codified at Code of Civil Procedure 1179.04.5. This section now disallows a landlord from using the security deposit for any "COVID-19 rental debt," during the time period, unless agreed to in writing.

Assuming that deductions from the security deposit are made, and they almost always are, the landlord must then give the tenant an itemized statement specifying the repairs or cleanings that are the basis of the deductions from the security pursuant to Section 1950.5(f)(2). This itemized statement must also include the text of the code itself.

There are some crucial mistakes many landlords make when it comes to a security deposit. The biggest one -- the one we see day in, and day out -- is that the landlord went and spent the security deposit money. This usually results in panic and problems, and sometimes lawsuits. So, if you are reading this article and advising landlords, make sure that the landlord does not spend the security deposit; instead, it is good practice put that deposit in a separate account and make sure it is left alone (or accruing interest) until the termination of the tenancy. In properties subject to Los Angeles' Rent Stabilization Ordinance, the security deposit must be accruing (.07%) interest, which is also the tenant's property.

Keeping the security deposit in a separate account is especially important considering the code provides a penalty against the landlord for the bad faith retention, which may be wholly determined by the court alone. "The bad faith claim or retention by a landlord or the landlord's successors in interest of the security or any portion thereof in violation of this section, or the bad faith demand of replacement security in violation of subdivision (j), may subject the landlord or the landlord's successors in interest to statutory damages of up to twice the amount of the security, in addition to actual damages. The court may award damages for bad faith whenever the facts warrant that award, regardless of whether the injured party has specifically requested relief. In an action under this section, the landlord or the landlord's successors in interest shall have the burden of proof as to the reasonableness of the amounts claimed or the authority pursuant to this section to demand additional security deposits." Section 1950.5( l).

All of that said, there is a nice "out" built into the code for those of us who would never have the time to spend on such relatively small matters. The small claims court may maintain jurisdiction on any disputes involving security deposits up to $10,000. For those deposits over that amount, the other civil courts are at their disposal. Section 1950.5(n). 

#992

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