BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
ALLOWABLE TENANT SECURITY DEPOSITS
As a general rule, residential landlord may only collect first month’s rent plus a security deposit equal to 2 months of rent for unfurnished units, and 3 months of rent for furnished units.
1. DEFINITION: A security deposit is 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 “application screening fees.”
For example, for an unfurnished residential property at $5,000 per month under a 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 general processing fee, that $50.00 is considered as part of the $10,000 security deposit.
No lease or rental agreement may contain any provision characterizing the security deposit as “nonrefundable.”
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 still apply, and the landlord may not collect or demand any additional amount of money at the beginning of the tenancy.
NOTE: No “Pet Deposit” 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”
2. 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.)
2. In addition to the security deposit, a landlord may collect the first month's rent in advance. Other than the first month's rent, advance rent payment may be required only if the amount prepaid is at least six month's rent.
3. A landlord may charge a nonrefundable application screening fee for actual, out-of-pocket costs for obtaining information about a rental application, such as credit reports and reference checks.
4. 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 alterations, but not for cleaning or repairs.
3. 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.
4. INTEREST ON DEPOSITS: There is no statewide requirement that the security deposit be placed in a special account or that it bear interest. And 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.
5. HANDLING SECURITY DEPOSITS AT THE CLOSE OF ESCROW: 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 the landlord, directly or through his/her agent, within a reasonable time, must either:
1. Transfer the deposit to the tenant, minus any lawful deductions; and provide tenant with an accounting, or:
2. Transfer the deposit minus lawful deductions to the new owner; and also notify the tenant by personal delivery or first-class mail of the transfer, 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 personal delivery, the tenant should acknowledge receipt of the notice by signing his or her name on the landlord’s copy of the notice.
In either case, the landlord must also deliver to the new owner a statement accounting for all deductions lawfully taken from the deposit, and indicating which choice the seller made about transferring the security deposit.
Also, the new owner may not require the tenant to pay any new or additional security deposit to replace the amount that the seller may have deducted as lawful deductions from the amount given to the buyer, 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 the amount of security deposits being held. Disclose those amounts to the buyer.
2. Tell your seller to be sure to comply with the law and the purchase agreement in 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 seller to a qualified California real estate attorney.
3. If the Purchase Agreement requires the seller to deliver the security deposits to the buyer, the seller may not return them to the tenant prior to COE, even though the Civil Code allows for such a practice, as that could constitute a breach of the contract obligations.
Buyer’s Agents
4. Review all rental agreements and make sure listing agent and seller properly address security deposits in the disclosures.
5. If your buyer wants to be sure that seller will deliver the tenants’ security deposits to buyer at COE (which most buyers most certainly will), this must be clear in the purchase agreement so that the seller does not simply return the deposit to the tenant prior to COE.
A. 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. That form provides that the seller shall deliver all unused security deposits to buyer at COE. Use this form is there are tenants.
B. San Francisco: Paragraph 14 of the SFAR Purchase Agreement provides that seller shall deliver all tenant deposits to buyer at COE.
C. PRDS: The PRDS Purchase Agreement does not address tenant deposits. For this purpose you can use the CAR TIP form. While normally not a good idea to mix forms from different forms libraries, in this case the TIP form does not reference any contract paragraphs so is generic enough to use with the PRDS Purchase Agreement.
6. Check the closing documents to assure that the security deposits have been addressed. Buyers will be upset if the deposits are not credited to them at COE.
DON’T PRACTICE LAW: If your sellers or buyers have any security deposit, or other landlord/tenant problems or questions, send them to a qualified real estate attorney.
FOR FURTHER INFORMATION: See the CAR Q&A on this subject at:
http://www.car.org/legal/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 09/23/16