Security Deposits

Security Deposits Must Be Refundable

It is no longer legal to ask the tenant to pay administrative costs. It’s also illegal to charge a hidden nonrefundable deposit by charging considerably more rent for the first month than for later months. It is illegal to charge a fixed fee for cleaning drapes or carpets or for painting, or to charge administrative “move-in” fees. All such fees are legally considered security deposits and must be refundable. Finally, you cannot insist that a security deposit be made in cash. (CC § 1947.3.)

How Landlords May Use Deposits

State law controls how landlords may use security deposits. (CC § 1950.5.) You can withhold all or part of the deposit if the tenant skips out owing rent or leaving the apartment filthy or damaged. The deposit may be used by the landlord “in only those amounts as may be reasonably necessary” to do the following four things only:

  1. To remedy defaults in payment of rent.
  2. To repair damage to the premises caused by the tenant (except for “ordinary wear and tear”).
  3. To clean the premises, if necessary, when the tenant leaves. For tenancies that began on or after January 1, 2003, the amount of cleaning you may require cannot be more than will “return the unit to the same level of cleanliness it was in at the inception of the tenancy.” (CC § 1950.5( a)( 3).) In other words, if you delivered a merely broom-clean unit, you can’t require your tenant to return it antiseptically spotless.
  4. If the rental agreement allows it, to pay for the tenant’s failure to restore or replace personal property.

Dollar Limits on Deposits

State law limits the amount you can collect as a deposit. (CC § 1950.5 (c).) For unfurnished units, the deposit (including last month’s rent) can’t exceed two months’ rent.

How to Increase Deposit Amounts

Since the maximum amount of a deposit is tied to the rent, an increase in rent affects the allowable deposit. You can normally change the amount of rent for a month-to-month tenancy, as well as other terms of the agreement, by giving the tenant a written 30-Day Notice of Change of Terms of Tenancy. If you increase the rent with a 30-day notice, you can also legally increase the amount of the deposit.

Interest, Accounts, and Record Keeping on Deposits

No state law requires landlords to pay interest on security deposits. In most localities, you don’t have to pay tenants interest on deposits, or put them in a separate bank account— unless you require this in your lease or rental agreement. In other words, you can simply put the money in your pocket or bank account and use it, as long as you have it available when the tenant moves out.

When Buying / Selling a Rental Property

It’s a good idea to make sure that the security deposit transfer is written into the sales contract. The transfer of the security deposit from seller to buyer (CC § 1950.5( h)) can be part of the financial breakdown upon close of escrow. Tenants should also be informed of the transfer of their security deposit.

Notice of Sale of Real Property and of Transfer of Security Deposit Balance

Downloadable Forms