What You need to Know about the New Security Deposit Law
What You Need to Know About the New Security Deposit Law
Last year, the governor signed AB 12, an act to amend, repeal, and add a section to California Civil Code 1950.5, which governs security deposits statewide. BPOA members need to be aware of these changes, which go into effect on July 1, 2024.
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“Security,” as used in CC 1950.5, means any payment, fee, deposit, or charge - except for application fees – imposed at the beginning of tenancy as advanced payment of rent or to cure defaults, damages, or cleaning (for tenancies established on or after January 1, 2003) upon lease termination.
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The change is not retroactive; leases executed before July 1, 2024, are unaffected.
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No more differentiation between furnished and unfurnished units.
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3x monthly rent deposits are a thing of the past.
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If you accept advance payment of rent, the lease term must be six months or longer, and the payment for no fewer than six months.
As of July 1, 2024, security deposits will be capped at one month’s rent for most owners statewide. This deposit ceiling includes any deposit charged for pets or keys, and advance payment of rent.
I’m a visual learner, so let’s run through a scenario. It’s July 3, 2024, and you’ve leased an apartment for one year at a monthly rent of $2400. The move-in date is July 17, 2024. They have a dog and have agreed to pay a $500 pet deposit. You’ve asked them to pay the first month’s rent and a deposit, which includes prorated rent for month two and the pet deposit, at lease signing. The Summary of Key Information looks like this:
Can you spot the errors?
|
Initial Monthly Rent |
$2400 |
See Section 3.1 |
|
Pro-Rated Rent Amount |
$1360 |
See Section 3.1 |
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Total Deposits: |
$4260 |
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Security Deposit: |
$2400 |
See Section 4 |
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Other Deposit(s): |
$500 (refundable pet deposit) |
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Total Due at Signing: |
$6660 |
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Late Fee: |
$75 |
See Section 3.6 |
It’s crucial to know that pet deposits must be factored into your overall security deposit, which cannot surpass one month’s rent. Furthermore, any advance payment of rent, including prorated rent, but specifically for periods less than six months, is considered part of the overall security deposit. I included the rent in the total due at signing for this example, but whether you charge the first month’s rent at lease signing or move-in is up to you.
If your practice has been to collect the first month’s rent, the prorated second month’s rent, and the security deposit to secure a lease that begins mid-month or late in the month, the BPOA recommends modifying your practice. Collect a full month’s rent at move-in (month one) and collect the prorated rent, based on the lease start date, in the second month (month two).
If we take the same leasing scenario and apply the recommended practices, your Summary of Key Information looks like this:
|
Initial Monthly Rent |
$2400 |
See Section 3.1 |
|
Pro-Rated Rent Amount |
$1360 (due August 1, 2024) |
See Section 3.1 |
|
Total Deposits: |
$2400 |
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|
Security Deposit: |
$2400 |
See Section 4 |
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Other Deposit(s): |
none |
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Total Due at Signing: |
$4800 |
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Late Fee: |
$75 |
See Section 3.6 |
Did you know that pet deposits can only compensate the property owner for pet-related damages, while general security deposits can compensate owners for damages caused by tenants, their guests, or their pets? So, when the state limits the amount you can collect, you’re best off collecting 100% of the allowable amount as a general security deposit.
Good News for Small Owners:
There is, however, an allowance for small owners. Defined as owning a maximum of two properties with no more than four collective dwelling units offered for rent, the deposit is capped at two months’ rent. Again, it does not matter whether the unit is furnished or not. However, the deposit is capped at one month’s rent if your lessee is a service member.
Given the rise in regulations and the decrease in security deposits, it is crucial to screen potential tenants thoroughly. Relying solely on instincts or “good feelings” about individuals is not a viable approach. It is imperative to establish and consistently follow a screening policy. If you currently lack a screening policy and require assistance establishing one, visit the Rental Housing Forms section in the Content Library for BPOA’s Rental Criteria and Screening Policy Guidance documents. Lowering risks by renting to the most qualified applicants will benefit you in the long run.