LANDLORD – TENANT SECURITY DEPOSIT REQUIREMENTS

ISSUE: What happens if a residential landlord fails to provide a written accounting to the tenant, regarding the tenant’s security deposit, within 21 days of lease termination as required by Civil Code Section 1950.5?

SHORT ANSWER: If, within the statutory 21 day period, the landlord has not provided the tenant with a written accounting of the portion of the security deposit the Landlord plans to retain, the right to retain all or part of the security deposit under section 1950.5, subdivision (f), has not been perfected, and the landlord must return the entire deposit to the tenant.  However, if a landlord has failed in good faith to take advantage of the summary deduct-and-retain procedure allowed under section 1950.5, subdivision (f), the landlord may still recover damages for unpaid rent, repairs and cleaning (Civ. Code § 1950.5, subd. (e)) in a subsequent judicial proceeding provided that the landlord has suffered such damages and that the amount claimed is reasonable (Civ. Code § 1950.5, subd. (k)). (Granberry v. Islay Invs. (1995) 9 Cal.4th 738, 749-750.)  Further, there are two additional exceptions to the good faith justification for not timely itemizing or returning the deposit:  1) When a repair to be done by the landlord cannot reasonably be completed within 21 calendar days after the tenant vacates, or if documents from a person or entity providing services, materials, or supplies are not in the landlord's possession within 21 calendar days after the tenant vacates, Civil Code section 1950.5(g)(3), allows the landlord to use a repair estimate in calculating the security deposit refund; or,  2)  The total amount deducted for repairs and cleaning does not exceed $125, or the tenant waived the rights specified in Civil Code section 1950.5(g)(2) and (g)(3), in writing. 

DISCUSSION:

California Code of Civil Procedure section 1950.5 and case law govern the timely itemization concerning and disposition of a security deposit.  There are several steps a landlord must follow in order utilize the deposit.

First, there is a definitional issue.  There is a need to understand what a deposit is and how it can be used by the landlord, as that may bear on good or bad faith retention of the deposit. As provided in 1950.50 (a): “This section applies to security for a rental agreement for residential property that is used as the dwelling of the tenant.

(b) As used in this section, “security” means any payment, fee, deposit, or charge, including, but not limited to, any payment, fee, deposit, or charge, except as provided in Section 1950.6 [relating to an “application screening fee”], 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 or by a guest or licensee of the tenant.

(3) The cleaning of the premises upon termination of the tenancy necessary to return the unit to the same level of cleanliness it was in at the inception of the tenancy. The amendments to this paragraph enacted by the act adding this sentence shall apply only to tenancies for which the tenant's right to occupy begins after January 1, 2003.

(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.” (Cal. Civ. Code § 1950.5.)

The security deposit can be utilized by the Landlord for the items listed in 1-4 above.  However, the use categories are not limited, as the statute provides, the list is “including but not limited to,” which may allow landlord attorneys to argue for a broader use of the security deposit (such as late fees, attorney’s fees, agent commission fees, etc.)   

Second, Section 1950.5 (f)(1) provides in pertinent part:  “Within a reasonable time after notification of either party’s intention to terminate the tenancy, or before the end of the lease term, the landlord shall notify the tenant in writing of the tenant’s option to request an initial inspection and of the tenant’s right to be present at the inspection. [A]t a reasonable time, but no earlier than two weeks before the termination or the end of lease date, the landlord, or an agent of the landlord, shall, upon the request of the tenant, make an initial inspection of the premises prior to any final inspection the landlord makes after the tenant has vacated the premises. The purpose of the initial inspection shall be to allow the tenant an opportunity 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 from the security.” 

In other words, after notice of intent to terminate the lease, the landlord is required to give the tenant notice of tenant’s right to be involved in a property inspection to allow the tenant an opportunity to remedy alleged deficiencies, which may impact on the landlord’s use or return of the security deposit.

Finally, Section 1950.5 (g)(1) provides in pertinent part:  “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. (2) Along with the itemized statement, the landlord shall also include copies of documents showing charges incurred and deducted by the landlord to repair or clean the premises . . . .”

From the plain language of the statute, the California Supreme Court has held:  “we conclude that a landlord (1) must return a tenant's security deposit within the specified period after the termination of the tenancy, (2) may retain all or part of the security deposit as compensation for unpaid rent, repairs, and cleaning, and (3) must provide a written accounting of any amounts retained within the specified period. If, within the specified [21 day] period, the landlord has not provided the tenant with a written accounting of the portion of the security deposit he plans to retain, the right to retain all or part of the security deposit under section 1950.5, subdivision (f), has not been perfected, and he must return the entire deposit to the tenant.” (Emphasis added.)  (Granberry v. Islay Invs. (1995) 9 Cal.4th 738, 744-745).

In Granberry, Defendant landlords owned or operated between 1200 and 1500 residential rental units. During the period relevant to this case, April 27, 1978, to April 27, 1981, it was defendants' practice to charge tenants an increased rental fee for the first 31 days of tenancy, but to charge a reduced fee for all subsequent months.  Defendants never returned this fee in whole or in part; rather, they simply retained it as part of the rental payment for the first month.

Plaintiffs, a class of former tenants, sued for a refund of the amount by which the rent they had paid for the first 31 days of their tenancy exceeded the amount they paid in each of the following months. After motions and appeals and a remand, a jury found that the excess rental payments were security deposits within the meaning of section 1950.5, subdivision (b), but that defendants had not retained them in bad faith. (Id. at p. 743.)

The California Supreme Court stated the issue:  “The issue now before us is whether, notwithstanding their good-faith lack of compliance, defendants may set off amounts allegedly due for unpaid rent, repairs, and cleaning against money due plaintiffs as a refund of their security deposits. We conclude that defendants may do so.”  (Id.)

In other words, while landlords are statutorily required to comply with the 21 Day Rule, and return the security deposit for failure to do so, there is a good faith exception, which allows the landlord to claim set off in a subsequent action concerning the security deposit. According to the Granberry Court, “[i]f a landlord has failed in good faith to take advantage of the summary deduct-and-retain procedure allowed under section 1950.5, subdivision (f), the landlord may still recover damages for unpaid rent, repairs and cleaning (Civ. Code § 1950.5, subd. (e)) in a subsequent judicial proceeding provided that landlord has suffered such damages and that the amount claimed is reasonable (Civ. Code § 1950.5, subd. (k)). (Granberry v. Islay Invs. (1995) 9 Cal.4th 738, 749-750.)

An obvious question is what is a good faith (or bad faith) failure to comply with the statute regarding the security deposit?

Neither Section 1950.5 nor case law is clear.  In Granberry, good faith seemed to be the landlord’s determination (albeit incorrect determination) that the money collected was increased rent, suggesting that a reasonable but mistaken characterization of the deposit might be good faith. 

In one case, a class was certified on a claim bad faith retention of security deposits.  (Peviani v. Arbors at California Oaks Prop. Owner, LLC (2021) 62 Cal. App. 5th 874, 882, reh'g denied (Apr. 29, 2021), review denied (July 14, 2021). In Peviani, the court stated:  “the elements of an action for wrongful retention of a security deposit under Civil Code section 1950.5 are: (1) the plaintiff paid a security deposit; (2) the security deposit was for a residential property; (3) the plaintiff used the property as a dwelling; and (4) the amounts deducted by the defendant were not reasonably necessary. If the plaintiff is seeking punitive damages, then it must also be shown that the defendant made the deductions in bad faith. (Civ. Code, § 1950.5, subds. (a), (e) & (l).)”  (Id. at p. 882.)   (See Civil Code section 1950.5(l) for the penalties or damages that may be assessed against the landlord for a bad faith claim or retention by a landlord of the tenant’s security deposit or any portion thereof.)

While Peviani addressed class certification, the facts alleging bad faith included: the landlords had a pattern and practice of improperly retaining security deposits by charging for normal wear and tear, adding frivolous charges, charging for repairs that were never performed, charging for unrepaired damage caused by previous tenants, and charging for utility bills that were already paid.  However, that case specifically addressed class certification not bad faith.

In an unpublished case, the court of appeal affirmed that Granberry “explicitly limited its holding to cases involving good faith failures only. (Alcoser v. Thomas (Cal. Ct. App. Feb. 16, 2011) (No. A124848, 2011 WL 537855, at 9–10 (Not Officially Published).  Like Peviani, Alcoser involved claims of bad faith retention of security deposits, which included the landlord not giving an itemization or charging for but not timely making repairs, or charging for repairs for pre-existing damages.  The jury found bad faith on these facts.  Again, however, this was an unpublished case and may not be formally relied on.  

There are two additional exceptions to the 21 Day Rule (in addition to a good faith failure to comply): 

1.      When a repair to be done by the landlord or the landlord's employee cannot reasonably be completed within 21 calendar days after the tenant vacates, or if documents from a person or entity providing services, materials, or supplies are not in the landlord's possession within 21 calendar days after the tenant vacates, Civil Code section 1950.5(g)(3) allows the landlord to use a repair estimate in calculating the security deposit refund. The landlord may deduct the amount of a good faith estimate of the charges that will be incurred and provide that estimate in or with the itemized statement. If the reason for the estimate is because the documents from a person or entity providing services, materials, or supplies are not in the landlord's possession, the itemized statement shall include the name, address, and telephone number of that person or entity. Within 14 calendar days of completing the repair or receiving the documentation, the landlord shall complete the requirements in Civil Code section 1950.5(g)(1)–(2), including refunding the appropriate amount of the security deposit.

2.      Additionally, under Civil Code section 1950.5(g)(4), the landlord need not give the tenant the documentation required by Civil Code section 1950.5(g)(2) or (g)(3) if either:

a.       The total amount deducted for repairs and cleaning does not exceed $125, or

b.      The tenant waived the rights specified in Civil Code section 1950.5(g)(2) and (g)(3), but the waiver shall only be effective if signed at the same time as (or after) a notice to terminate under Civil Code section 1946 or section 1946.1 or Code of Civil Procedure section 1161 was given, or no earlier than 60 calendar days before the expiration of a fixed-term lease; the waiver must substantially include the text of paragraph (2).   

In sum, the residential landlord must handle the security deposit with care:  There are several requirements to meet in order to properly account for and/or retain some or all of the tenant’s security deposit.  The failure to be aware of and comply with the foregoing could subject the landlord to a forced return of the entire security deposit and an imposition of damages.  

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