Landlord/Tenant 101: Back to Basics

The Security Deposit

WRITTEN BY SAUL KLEIN

Security deposits are the subject of more disputes between landlords and tenants than any other. This is often because of misunderstandings about the law and differences of opinion regarding what constitutes “clean” or “normal wear and tear.” The law in California received a major overhaul because of legislation that went into effect in 2004.

Collecting the Security Deposit

• You may charge up to two times the monthly rent if the rental unit is unfurnished, up to three times the monthly rent if the unit is furnished, plus an additional half-month’s rent if there is a waterbed.
• Last month’s rent, pet deposits, key deposits, cleaning deposits, and any other “deposits” for potential future losses are all considered to be a part of the security deposit. When totaled, they may not exceed the legal limits. We advise that you label all deposits as “security deposit.” This gives you the maximum flexibility in its use.
• The law does not permit any “nonrefundable” deposits of any kind, such as an automatic deduction for flea spraying when there has been a pet.

Initial Inspection Prior to Move-Out

Landlords generally must provide tenants with a notice of the tenant’s right to a pre-move-out inspection.

Returning the Security Deposit

• The lease can allow the landlord up to 21 days to provide the tenant with the final accounting and return the balance of the tenant’s security deposit. The period begins when the landlord regains possession of the property.
• This final “disposition of the security deposit” accounting must be either personally delivered or sent by first-class mail, postage prepaid, to the last known address of the tenant. Often this means mailing it to the premises the tenant just vacated. If it is returned to you by the post office, keep the original, plus a copy of the unopened return envelope as proof that you mailed the accounting within the prescribed time. If the returned mail has a forwarding address, send it to that address.
• If you have a roommate situation, it is advisable to make any refund check payable to all of the tenants who have signed the lease. This way you avoid the situation where each tenant claims he or she should have received the deposit refund.

Security Deposit Accounting Requirements

• Owners and managers must provide their tenants with written receipts showing the charges incurred to repair or clean the apartment if the total amount is $125 or more. The receipts must be attached to the final security deposit accounting.
• If the landlord did the work personally, he or she must “reasonably” describe the work performed and must include the time spent and the reasonable hourly rate charged. Arguments about what is “reasonable” are common, so a conservative approach is highly recommended.
• If a contractor does the work, the owner or manager must provide the tenant with a copy of the bill, invoice or receipt supplied, including the contractor’s name, address and telephone number.

Owners and managers must also provide receipts for materials if the tenant is being charged for them. Property owners or managers who purchase materials on an on-going basis may provide the tenant with a copy of a vendor price list or any other vendor document that reasonably documents the cost of the item used in the repair or cleaning of the unit.

• If a repair cannot be made, or receipts are not available within the 21-day period, the owner or manager may deduct only a good faith estimate of the deduction amounts and must provide an estimated accounting to the tenant within the 21-day period.
• If the owner or manager doesn’t have the receipts within the 21-day period because they are still with the contractor, the owner or manager must provide the name, address and telephone number of the contractor along with the estimate. When the final figures and receipts are available, the owner or manager must provide a final statement within 14 days from the date the repair is completed or from the date the owner or manager receives the receipt documents from the vendor.
• The tenant has 14 days after receiving the final itemized statement to request additional receipts from the owner or manager. If receipts are requested, the owner or manager has another 14 days to provide the additional receipts.

The only exception to this law exists if the repairs or cleaning do not exceed $125 total, or if the tenant signs a written waiver of his/her right to receive the receipts. The waiver can only be signed after the termination notice is given, including three-day notices, or within 60 days of the expiration of a fixed term lease. If the waiver is signed, the tenant can still request receipts within 14 days after receiving the final security deposit statement.

We recommend that you use a well-drafted comprehensive security deposit accounting form, such as the CAA form, to help you comply with the law.

The security deposit may be used:

• For unpaid rent;
• To repair damages to the premises, not including ordinary wear and tear, caused by the tenant or by a guest or licensee of the tenant;
• To clean the premises to return it to the same level of cleanliness it was in when the tenant moved in; and,
• To restore, replace, or return personal property or appurtenances, exclusive of ordinary wear and tear, if the rental agreement authorizes this use of the security deposit.
• The express terms of the security deposit law do not specifically list other items but indicate that this list may not be complete. It remains unsettled whether it is appropriate to use the deposit for other purposes such as late charges, unpaid utility charges, and N.S.F. check charges.

The Penalties

The damages for the bad faith retention of a security deposit by a landlord are up to two times the amount of the security deposit. They might be awarded in a lawsuit even if the tenant did not ask for those damages in the lawsuit.

Resolving Security Deposit Disputes

If you cannot reach an amicable agreement with the tenant over a security deposit dispute, the tenant may file suit in Small Claims Court. The jurisdictional limit of Small Claims Court is $7,500 per claim by an individual as of January 1, 2006 (up from $5,000). Claims by entities such as partnerships, corporations, and LLCs are limited to $5,000 or less. Actions against guarantors or co-signers of the lease are limited to $4,000 per claim or $2,500 if the guarantor does not charge a fee for the service.

(Editor’s Note: Landlord/Tenant laws vary from state to state. This article relates specifically to the laws in California. For information about laws and rules and regulations in other state jurisdictions, check with that state’s governing real estate body.)