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Don't Dither with Deposits
by Daniel Stern
Issues related to security deposits seem to be the subject of many landlord-tenant disputes after the termination of a tenancy that was otherwise free of landlord-tenant conflict. An understanding of and an adherence to the following laws related to security deposits may help to avoid many of these disputes.
Security deposits regarding residential property are governed by Civ. Code § 1950.5. A landlord may not demand or receive security in an amount or value in excess of two months’ rent, in the case of unfurnished residential property, or three months’ rent, in the case of furnished residential property, plus an additional one-half month’s rent if the tenant will have a waterbed, in addition to any rent for the first month paid on or before initial occupancy.
“Security” means 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, compensation of the landlord for the tenant’s default in the payment of rent, repair of damages to the premises exclusive of ordinary wear and tear caused by the tenant, and cleaning of the premises on the tenancy’s termination. Therefore, the last month’s rent, pet deposits, key deposits, cleaning deposits and any other deposits for potential future losses are all considered to be part of the security deposit and, when totaled, they may not exceed the legal limits as previously described.
A security deposit can also secure the remedy of 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. Nonrefundable deposits of any kind are not allowed under the code. “Security” does not include application fees.
The above limitations regarding the amount of the deposit do not prohibit an advance payment of not less than six months’ rent when the lease’s term is six months or longer. Neither does it preclude the landlord and tenant from entering into a mutual agreement for the landlord, at the tenant’s request and for a specified fee or charge, to make structural, decorative, furnishing or other similar alterations, other than cleaning or repair work, for which the landlord may make a claim on the deposit of the previous tenant.
The landlord holds any such payment or deposit for the tenant who is party to the agreement. The tenant’s claim to the deposit is prior to the claim of any creditor of the landlord except a trustee in bankruptcy. The landlord may claim from the security deposit only the amounts as are reasonably necessary for the purposes specified in Civ. Code § 1950.5(b). The landlord may not assert a claim against the tenant or the security for damages to the premises or any defective conditions that preexisted the tenancy, for ordinary wear and tear or the effects thereof, whether the wear and tear preexisted the tenancy or occurred during the tenancy, or for the cumulative effects of ordinary wear and tear occurring during any one or more tenancies. Interest on security deposits must be paid once a year according to the interest rate set forth by the San Francisco Rent Board.
Tenants are entitled to a pre-move-out inspection of the premises within a reasonable period of time after the notification of either the landlord’s or tenant’s intention to terminate the tenancy. The landlord must notify the tenant in writing of the option to request an inspection of the premises and of the tenant’s right to be present at the inspection. The purpose of the inspection is to allow the tenant an opportunity to remedy identified deficiencies in order to avoid deductions from the security. If the tenant chooses not to request an inspection, the landlord’s duties with regard to an inspection are discharged. The pre-move-out inspection is not required where the lease is terminated pursuant to a three-day notice.
Based on the inspection, the landlord must give the tenant an itemized statement specifying repairs or cleaning that are proposed to be the basis of any deductions from the security. This statement must include the text of Civ. Code § 1950.5(b)(1)-(4). The tenant must be given the opportunity during the period following the inspection until termination of the tenancy to remedy identified deficiencies, in a manner consistent with the rights and obligations of the parties under the rental agreement, in order to avoid deductions.
Within 21 days of the landlord regaining possession of the premises, the landlord must provide an itemized statement indicating the disposition of the security, as well as copies of documents showing charges incurred and deducted by the landlord to repair and clean the premises, and must return any remaining security to the tenant. Landlords must provide the tenant with written receipts showing the charges incurred to repair or clean the premises if the total amount is $125 or more. If the landlord does the work, the landlord must reasonably describe the work performed and must also include a breakdown of the time spent and the hourly rate charged for the time spent. The hourly rate must be “reasonable.” If a contractor does the work, the tenant must be supplied with a copy of the contractor’s bill, invoice or receipt, which must include the contractor’s name, address and phone number.
If the repair cannot be made or receipts are not available within the 21-day period, a good faith estimate of the amounts deducted may be made. An estimated accounting to the tenant must be made within the 21-day period. This final accounting must be either personally delivered or sent by first-class mail to the last known address of the resident, which is typically the address of the premises just vacated, or to another address if so supplied by the tenant. If the security deposit accounting is returned to you by the post office, keep the original of the unopened returned envelope as proof that you mailed the accounting within the 21 days.
A landlord who has failed in good faith to take advantage of the summary nonjudicial deduct-and-retain procedure allowed under Civ. Code§ 1950.5(f) may recover damages for unpaid rent, repairs and cleaning (permitted under Civ. Code § 1950.5(e)) in a subsequent judicial proceeding. To recover these damages, the landlord must that he or she has suffered the damages and that the amount claimed is reasonable, as provided in Civ. Code § 1950.5(l).
Whether or not the property is residential, on termination of the landlord’s interest in the unit (property) in question, whether by sale, assignment, death, appointment of a receiver, or otherwise, the landlord or his or her agent is required, within a reasonable time, to do the following, whereupon the landlord will be relieved of any further liability regarding the security deposit. In the case of residential property, transfer the portion of the security remaining after any lawful deductions made under Civ. Code § 1950.5(e) to the landlord’s successor in interest. The landlord must thereafter notify the tenant by personal delivery or by first-class mail, postage prepaid, of the transfer, of any claims made against the security, of the amount of the security deposited, and of the names of the successors in interest, their address, and their telephone number.
If the notice to the tenant is made by personal delivery, the tenant must acknowledge receipt of the notice and sign his or her name on the landlord’s copy of the notice; or return the portion of the security deposit remaining after any lawful deductions, and, if residential property is involved, furnish the tenant with an itemized written statement of the basis for, and the amount of, the security received and the disposition of the security. On receiving any portion of the security deposit, the transferee has all of the rights and obligations of the landlord with regard to the deposit, as previously discussed. Before the voluntary transfer of a landlord’s interest in a residential dwelling unit subject to Civ. Code § 1950.5, the landlord must deliver to the landlord’s successor in interest a written statement indicating the security remaining after any lawful deductions are made, an itemization of any lawful deductions from any security received, and his or her election. This provision does not affect the validity of title to the real property transferred in violation of its provisions.
If the requirements are not complied with, the landlord’s successors in interest are jointly and severally liable with the landlord for repaying the security or that portion of the security that the tenant is entitled to. A landlord’s successor in interest may not require the tenant to post any security to replace that amount not transferred to the tenant or successors in interest unless and until the successor in interest first makes restitution of the initial security or provides the tenant with an accounting. This provision does not preclude a successor in interest from recovering (from the tenant) compensatory damages that are in excess of the security received from the landlord that was previously paid by the tenant to the landlord. However, if on inquiry and reasonable investigation, a landlord’s successor in interest has a good faith belief that the lawfully remaining security deposit is transferred to him or her or returned to the tenant, the successor in interest is not liable for damages or for any security not transferred.
A bad-faith claim or retention by the landlord (or a transferee or successor in interest) of any portion of the security deposit, if the property is residential, may subject the landlord to a statutory penalty of up to twice the amount of the security or, if the property is not residential, to a penalty of not more than $200 in addition to actual damages. If the property is residential, the court may award damages for bad faith whenever the facts warrant this award, regardless of whether the injured party has specifically requested relief. The landlord or successor in interest has the burden of proof as to the reasonableness of amounts claimed or as to the authority to demand additional deposits. A proper understanding of the above-described provisions will help all landlords avoid any disputes with the tenants regarding the disposition of their security deposits.
While landlords have the right to make deductions according to the law previously discussed, a conservative approach in taking these deductions is urged in order to avoid the time and expense of security deposit disputes and the potential liability associated with tenant lawsuits for bad faith retention of security deposit.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Daniel R. Stern is with Wasserman-Stern and can be contacted at 415-567-9600. Copyright © 2010 by Black Point Press. All rights reserved.