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Allowable Tenant Security Deposits

by | Apr 20, 2018 | Landlord-Tenant

  1. I represent owners of a Triplex who are renting out two of their three units.  A prospective Tenant has a pet; the Owners are not against a Tenant having a pet but they want to have a separate, non-refundable “pet deposit” over and above the “Security Deposit” that they have been charging all of their other Tenants.

I seem to recall that there is a cap on how much a Landlord can collect as a Security Deposit but I do not know if that cap also applies to any separate fees such as a pet deposit.  I am also not sure if the Tenant’s animal is really a pet or if it can be classified as a Service/Companion Animal.   Does that make a difference?

 

  1. As a general rule, residential Landlords may only collect the first month’s rent plus a Security Deposit that is equal to two (2) months of rent for unfurnished units, and three (3) months of rent for furnished units.  The questions raised are best answered by how California law defines the term “Security Deposit” and the pitfalls that can exist under the Fair Housing Laws.
  1. DEFINITION:  A Security Deposit is defined in California Civil Code Section 1950.5 (b) as including any payment, fee, deposit or charge, including those imposed as an advance payment of rent. It includes any charges imposed at the beginning of the tenancy to reimburse the Landlord for costs associated with processing a new Tenant, other than the one carved out exception which is “application screening fees.”

Example:  Renting out an unfurnished residential property at $5,000 per month under a lease or month-to-month agreement, the maximum amount that the Landlord can collect up front is $15,000, or $5,000 rent for the first month, plus $10,000 as a Security Deposit.  If the Landlord charges a $50.00 fee to cut a new set of keys, that $50.00 is considered to be part of the $10,000 Security Deposit and cannot be an extra charge.

No lease or rental agreement may contain any provision characterizing the Security Deposit as being “non-refundable” regardless of the reason for the Security Deposit.

The above limits cannot be waived by the Tenant.  Even if the Landlord describes up-front charges as a “move-in fee,” “last month’s rent,” “pet deposit,” or “cleaning deposit,” the 2-month or 3-month limits noted still apply; the Landlord may not collect or demand any additional amount of money at the beginning of the tenancy over and above the statutory limit on the Security Deposit.

NOTE:  No “Pet Deposit” of any kind can be charged for an assistive, service or companion animal as that will constitute a violation of Fair Housing Laws.  See Weekly Practice Tip:

                        “Rental Testers Looking for Discrimination in Rentals”

  1. EXCEPTIONS:  These exceptions apply to the limit on Security Deposits:
  1. A Landlord is permitted to increase the deposit by one-half of one month’s rent when a Landlord is accepting a Tenant with a waterbed or water-filled furniture. (In that situation, the Landlord is also permitted to charge a reasonable fee for administrative costs and can require the Tenant to provide waterbed or water-filled furniture insurance.)
  1. In addition to the Security Deposit, Civil Code Section 1950.5(c) allows a Landlord to collect six months or more of advance payments, but only if the lease is for six months or longer duration.
  1. A Landlord may charge a non-refundable application screening fee for actual, out-of-pocket costs for obtaining information about a rental application, such as credit reports and reference checks; the best practice is to have documentation supporting each of these expenses if the charges are made non-refundable.
  1. A Landlord may include additional charges if there is a separate mutual fee agreement between the Landlord and Tenant for structural, decorative, furnishing, or other similar Tenant Improvements/Alterations, but not for cleaning or repairs.
  1. USE OF SECURITY DEPOSITS:  Security Deposits can be used to remedy defaults in payment of rent, to repair damage caused by the Tenant (beyond normal wear and tear), to clean the unit, and to satisfy any other Tenant defaults or obligations under the rental agreement or lease, such as taxes, insurance, or landscaping.
  1. INTEREST ON DEPOSITS:  There is no statewide requirement that the Security Deposit be placed in a special account or that it bear interest.  There are no restrictions on what the Landlord can do with the deposit during the term of the rental agreement, except for what is required by local ordinances or by the rental agreement or lease. If the Broker is serving as a Property Manager, the Security Deposit should either be given to the Landlord or placed in the Broker’s Trust Account in compliance with all Trust Fund Accounting principles; the Property Management Agreement will dictate which of those two options must be used.
  1. HANDLING SECURITY DEPOSITS AT THE CLOSE OF ESCROW ON THE SALE OF RENTAL PROPERTY:  Upon the sale of a Landlord’s Property with an existing Tenant (or other transfer of a Landlord’s interest by other means), the law requires that, with a reasonable period of time, the Landlord, directly or through his/her agent, must either:
  1. Transfer the Security Deposit to the Tenant, minus any legally-allowed deductions; and provide Tenant with an accounting of all such deductions, or:
  1. Transfer the Security Deposit minus any legally-allowed deductions to the new Owner; if this option is chosen, the Landlord must notify the Tenant by personal delivery or first-class mail that the Security Deposit was transferred to the new Owner, the amount of the Security Deposited, any claims made against the Security Deposit, and the name, address and telephone number of the new Owner(s).  If this notification is sent via personal delivery, the Tenant should acknowledge receipt of the notice by signing his or her name on the Landlord’s copy of the notice.

Regardless of which option is chosen, the Landlord/Seller must also deliver to the new Owner a statement accounting for all deductions taken from the Security Deposit and indicating which choice the Seller made about transferring the Security Deposit.

Regardless of the method chosen above, the new Owner may not require the Tenant to pay any new or additional Security Deposit to replace the amount that the Landlord/Seller may have deducted from the Security Deposit, unless the new Owner (a) first re-pays the balance of the Security Deposit to the Tenant, or (b) provides the Tenant with an accounting of all the amounts deducted.

PRACTICE TIPS:

 

Listing Agents

  1. If there are Tenants in the Property, discuss with the Seller/Landlord the amount of Security Deposits (if any) that are being held and obtain documentation regarding what deductions have been made from the Security Deposit(s).  This documentation and related information must be disclosed to the Buyer.
  1. Advise the Seller/Landlord in writing to be sure to comply with the law and the Purchase Agreement regarding the proper handling of those deposits.  If there is an issue as to what constitutes a Security Deposit, or what can be deducted from those deposits, refer your client to a qualified California real estate attorney with expertise in Landlord Tenant law for the area where the Property is located since some local jurisdictions have been creating their own set of rules and regulations regarding deposits whether or not the local jurisdiction has imposed any restrictions on rental increases and/or evictions.
  1. If the Purchase Agreement requires the Seller/Landlord to deliver the Security Deposits to the Buyer, remind the Seller/Landlord not to return those deposits to the Tenant prior to COE. Although the California Civil Code allows for such a practice, the Seller/Landlord’s actions must be consistent with the Seller/Landlord’s contractual obligations.

Buyer’s Agents

  1. Review all rental agreements with the Buyer and make sure that the documentation received from the Listing Agent and/or the Seller/Landlord addresses the current status of all Security Deposit(s).
  1. If your client wants to be certain that the Seller/Landlord will deliver the Tenants’ Security Deposit(s) to Buyer through Escrow at the time of closing (which is the preference of most Buyers), this issue must be clearly detailed in the Purchase Agreement so that the Seller/Landlord does not simply return the deposit to the Tenant prior to COE.  The Escrow Instructions will need to specify that, as a condition of closing, the Seller must put the Security Deposit(s) into Escrow.
  1. CAR Residential Purchase Agreement.  Paragraph 9.D has a checkbox to add form “Tenant in Possession” (zipForms form TIP) to the RPA if there is going to be one or more Tenants in possession after COE.  Paragraph 1 of the TIP form provides that the Seller shall deliver all unused Security Deposits to Buyer through Escrow at the time of closing.  Use this form if there are any Tenants who will remain in possession after COE.
  1. San Francisco:  The last sentence in Paragraph 14 of the SFAR Purchase Agreement (Rev. 12/17) provides that Seller shall deliver to Escrow Holder all Tenant deposits of any kind which shall be disbursed to Buyer at COE. There is no need to add the TIP form to the SFAR Purchase Agreement.
  1. PRDS:  The PRDS Purchase Contract does not currently address Tenant deposits but that form is in the process of being revised. The current PRDS Purchase Contract does not address the handling of Deposits for Tenants remaining in possession; the zipForms form TIP could be added to deal with this topic.
  1. Check the closing documents with the Buyer to make certain that the Security Deposits have been addressed.  Buyers will be upset if the deposits are not disbursed to them at COE.


DON’T PRACTICE LAW:   If your Sellers or Buyers have any problems or questions regarding Security Deposit(s) or any other Landlord/Tenant issues, send them to a qualified California real estate attorney with expertise in Landlord/Tenant law in the jurisdiction where the Property is location.


FOR FURTHER INFORMATION:  See the CAR Q&A on this subject at:

https://www.car.org/en/riskmanagement/qa/Landlord-Tenant-folder/security-deposits

 

  DO NOT FORWARD THIS DOCUMENT TO CLIENTS.  This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents.  It may not be reproduced or distributed without the express written consent of Broker Risk Management.  The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.

Copyright Broker Risk Management 2016                                                                 04/13/2018