LANDLORD – TENANT MAXIMUM SECURITY DEPOSIT IN CALIFORNIA THAT LANDLORDS CAN LEGALLY COLLECT

ISSUE: What is the maximum security deposit that California property owners can legally collect after July 1, 2024?

SHORT ANSWER:

For security deposits collected on or after July 1, 2024, the maximum security deposit for a dwelling unit is one month’s rent, regardless of whether the unit is furnished or unfurnished.

There is an exception if the property owner is (1) a natural person or limited liability corporation in which all members are natural persons AND (2) owns no more than two (2) residential properties, that collectively include no more than four (4) dwelling units offered for rent. If the landlord meets this criteria, the maximum security deposit may not exceed two months’ rent, regardless of whether the unit is furnished or unfurnished.

This exception does not apply, however, if the tenant is a service member. The maximum security deposit for service members remains at one month’s rent.

DISCUSSION:

California Assembly Bill 12 (AB 12) was passed by the State Legislature and signed by Governor Newsom on October 11, 2023.  AB 12 was enacted to amend, repeal, and add a section to California Civil Code 1950.5, which governs security deposits statewide.

Prior to July 1, 2024, California property owners had been allowed to collect a maximum security deposit of two months’ rent for unfurnished dwelling units and three months’ rent for furnished dwelling units. AB 12 amended this rule as detailed below.   

General Rule: Effective July 1, 2024

For all new leases signed on or after July 1, 2024, the maximum security deposit that California property owners are allowed to collect (in addition to the first month’s rent) is one month’s rent, regardless of whether the unit is furnished or unfurnished.  Because the change is not retroactive, leases executed before July 1, 2024 remain unaffected.

Civil Code section 1950.5, subdivision (c)(1), provides:

[A] landlord may not demand or receive security, however denominated, in an amount or value in excess of an amount equal to one month's rent, in addition to any rent for the first month paid on or before initial occupancy.

"Security," as defined in Civil Code section 1950.5, refers to any payment, fee, deposit, or charge—excluding application fees—required at the start of tenancy, whether as an advance payment of rent or to cover potential defaults, damages, or cleaning costs (for tenancies beginning on or after January 1, 2003) upon the lease's termination. (Civ. Code § 1950.5, subd. (b).)

It is important to note that the amendment to section 1950.5 did not change the rule stating that the security deposit ceiling includes all forms of deposits.  Thus, any security deposit, whether it is for pets, keys, or other purposes, must be included within the overall limits set by law.  The legislation does not provide for any separate or additional charges that would allow landlords to exceed the cap on security deposits.

Exception to the General Rule: Small Landlords

There is an exception to the one-month maximum security deposit for small landlords who meet specific criteria. Civil Code section 1950.5, subdivision (c)(4)(A), provides:

[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 addition to any rent for the first month paid on or before the initial occupancy if the landlord meets both of the following requirements:

(i) The landlord is a natural person or a limited liability company in which all members are natural persons [AND]

(ii) The landlord owns no more than two residential rental properties that collectively include no more than four (4) dwelling units offered for rent.

For purposes of this paragraph, “natural person” includes any natural person who is a settlor or beneficiary of a family trust. “Family trust” means a revocable living trust or irrevocable trust in which the settlors and beneficiaries of the trust are persons who are related to each other as siblings, spouse, domestic partner, child, parent, grandparent, or grandchild. (Civ. Code § 1950.5, subd. (c)(4)(C).)

Thus, under this exception a landlord can charge a security deposit of up to two months' rent, plus the first month's rent, if and only if (1) they are an individual or part of an LLC made up of individuals and (2) they own no more than two rental properties with a total of four units or less.

Exception to the Exception: Service Members

The small landlord exception to the one-month rule does not apply, however, if the prospective tenant is a service member.  In other words, the security deposit limit for service members remains at one month’s rent (plus first month’s rent), regardless of whether the landlord meets the exception’s criteria.  In addition, a landlord may not refuse to rent a unit to a service member due to this restriction on security deposits. Civil Code section 1950.5, subdivision (c)(4)(B), provides, in pertinent part:

A landlord shall not refuse to enter into a rental agreement for residential property with a prospective tenant who is a service member because this subparagraph prohibits the landlord from demanding or receiving a greater amount of security than that which is established in [Civ. Code § 1950.5, subd. (c)(1)].

For purposes of this paragraph, a “service member” means all of the following:

(1) A member of the militia, as defined in Military and Veterans Code section 120, called or ordered into active state or federal service pursuant to Military and Veterans Code section 143 or 146 or federal law. 

(2) A member of an active or reserve component of the Armed Forces who is ordered into active duty pursuant to federal law.

(Cal. Mil. & Vet. Code, § 400.)

Additional Provisions Under Section 1950.5, subd. (c)

Under Civil Code section 1950.5, subdivision (c)(2), if a landlord collects rent in advance, the lease must be for a term of six months or longer and the advance payment cannot cover less than six months of rent. Section 1950.5, subdivision (c)(2), states:

This subdivision does not prohibit an advance payment of not less than six months’ rent if the term of the lease is six months or longer.

Finally, a landlord and tenant can agree to make changes to the property, like structural or decorative alterations, for a fee, as long as the changes are not related to cleaning or repairs that the landlord can already charge the previous tenant for. Specifically, Civil Code section 1950, subdivision (c)(3), provides:

This subdivision does not preclude a landlord and a tenant from entering into a mutual agreement for the landlord, at the request of the tenant and for a specified fee or charge, to make structural, decorative, furnishing, or other similar alterations, if the alterations are other than cleaning or repairing for which the landlord may charge the previous tenant as provided by subdivision (e).

The crux of the amendment is to increase protection for tenants by limiting the amount landlords can charge for security deposits, especially for low-income or subsidized housing tenants. The change aims to reduce financial barriers to housing and promote fairness in rental agreements. On the other hand, these regulations may impose additional burdens on landlords by limiting their ability to mitigate potential damages or non-payment risks. Overall, the changes reflect a balance between tenant protection and landlord rights, but the impact of the change may vary depending on the specific rental dynamics.

EXAMPLE

Maria is a small landlord in California who owns a duplex where she rents out both units. After July 1, 2024, Maria wants to rent out one of the units to a new tenant, John. The unit is unfurnished, and the monthly rent is $2,000.  

Under the new law, if Maria does not qualify for the small landlord exception, the maximum security deposit she can charge John is one month’s rent--$2,000. (Civ. Code § 1950.5, subd. (c)(1).)

However, Maria does qualify for the small landlord exception because:

(1) She is a natural person; and

(2) She owns no more than two (2) residential properties that collectively include no more than four (4) dwelling units.

Therefore, Maria can legally collect a security deposit of up to two months’ rent, which would be $4,000 in this case. (Civ. Code § 1950.5, subd. (c)(4)(A).)

But, if John is a service member, the small landlord exception does not apply. In that scenario, Maria can only collect a maximum security deposit of one month’s rent--$2,000—despite her qualification as a small landlord. (Civ. Code § 1950.5, subd. (c)(4)(B).)

Authored by Attorney Babin

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.  

DISCLAIMER

This entry does not give specific legal advice about your specific legal problem. No text or graphic contained in this entry is to be or should be used or relied upon as legal advice. This entry does not create an attorney-client relationship. If you want specific legal advice about your particular legal issues, or if you want to create an attorney-client relationship, you need to retain the Law Offices of Ron A. Stormoen by a signed written retainer agreement.