CALIFORNIA LANDLORDS – Chapter 5, Refunding Security Deposits

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The Tenancy Is Coming To An End And You're Being Asked About Refunding The Security Deposit - What Do You Do?

The Tenancy Is Coming To An End And You’re Being Asked About Refunding The Security Deposit – What Do You Do?
Disclaimer

This article is intended to be a general discussion only, and should not be considered legal or real estate advice. Your use of it does not create either an attorney-client or broker-client relationship. Any liability that might arise from your use or reliance on this article, or any of its links, is expressly disclaimed. This blog is not legal, real estate, loan, accounting or tax advice, and is not to be acted on as such, it was outdated the moment it was written, and is subject to change without notice. If you are dealing with a potential problem with your investment property you are advised to retain the appropriate licensed professional. This article is not meant to apply to a rent controlled area in which special rules may apply.

INTRODUCTION

As you read this article keep in mind that it was written for the owners of property located in the State of California. This is critically important because state statutes, case law, and public policies can vary widely from state to state.

If you are an absentee owner who has decided to manage your own property it’s best you thoroughly familiarize yourself with the territory. This serialized blog is an attempt to identify at least some of the potentially serious issues faced by an inexperienced owner.

SECURITY DEPOSIT REFUNDS (PARTIAL OR OTHERWISE)

One of the areas most likely to produce an argument between a tenant and a landlord is the subject of security deposit refunds. Section 1950.5 of the California Civil Code specifies the procedures to be followed by the landlord for refunding, charging and accounting for a tenant’s security deposit.

Deductions Allowed

The landlord may use the tenant’s security deposit for pay the costs of the following:

  1. Unpaid rent;
  2. Cleaning expense but only to the extent that the unit is returned to the condition it was in at the start of the tenancy;
  3. Repair of damages which are beyond normal wear and tear and which were caused by the tenant and/or the tenant’s guests;
  4. If provided for in the rental agreement, the cost of restoring/replacing items of personal property (including keys) lost or damaged other than because of normal wear and tear.

Documenting The Deductions

Once a cost falls within one or more of the above categories the landlord does not automatically acquire carte blanche to spend unrestricted amounts of money. Only those amounts that are reasonably necessary may be withheld. The security deposit may not be used to repairs problems that pre-existed the tenancy that is currently ended.

Within 21 calendar days, or less, after the tenant has vacated, the landlord must either refund the entirety of the deposit or provide an itemized statement of the amounts of each deduction, together the reasons for the deductions and a refund of the unused security deposit. The landlord must also include receipts which follow certain guidelines:

  • If the work was performed by the landlord, or the landlord’s employees, the itemized statements must describe the work performed, the time spent and the hourly rate. The hourly rate must be reasonable.
  • If the work was performed by an outside service, copies of the business invoice must be included together with the person’s/business’ name, address, and telephone number.
  • Deductions for materials and/or supplies must be accompanied with an invoice/receipt.
  • If the repair can’t be completed with 21 days or an outside service hasn’t provided a receipt or invoice with 21 days the landlord may provide a good faith estimate and deduct that amount from the security deposit. With 14 days of completing the repairs the landlord must provide the tenant with a correct itemized statement and any refund due.
  • If the deductions are less than $126 or the tenant has given the landlord a waiver in writing the landlord is not required to provide copies of receipts or good faith estimates

The landlord must also give the tenant a copy of the California code sections which list the lawful uses of the tenant’s security deposit. (California Civil Code section 1950.5(f)(2))

Tenant Request For Pre Move-Out Inspection

A tenant can request an initial inspection prior to the end of the tenancy. A landlord must make the pre move-out inspection, if requested to do so, but may not do so without a tenant request. However, the landlord is not required to make the inspection if a 3 day notice has been served.  Whether or not there is an initial inspection the landlord will inspect the premises again after the tenant has vacated.

Landlord’s Notice

The landlord must give the tenant written notice advising that the tenant has the right to request an initial or pre-move out inspection. This notice must be given a reasonable amount of time after either the landlord or the tenant has given notice, or within a reasonable time before the lease ends.

Scheduling The Initial Inspection

The initial inspection can’t be scheduled earlier than two weeks before the end of the tenancy,

and the landlord must give the tenant 48 hours advance written notice of the inspection. The landlord is required to give this notice even if the landlord and tenant haven’t been able to agree on the date and time of the inspection. The governing concept here is that the tenant be given enough time to correct any items discovered in the initial inspection.

Approaches To Security Deposit Deductions

The problem with California’s security deposit statute (Civil Code 1950.5) is that it doesn’t give a clear finite definition to the phrases “reasonable necessary” and “normal wear and tear”. These terms are vague and ambiguous and subject to varied interpretations. Yet they are used every day to establish the propriety of security deposit deductions.

In the case of carpets and drapes one method is to prorate the total cost of replacement using the useful life of the item. For example, the charge for a 10 year carpet which is damaged in its 8th year should only be 0.2 of its total replacement cost.

An approach to repainting walls assumes that interior paint has a two year life span. So tenancy of less than six months requiring a repaint would be at the full cost. A tenancy of 6 months to 1 year would be two-thirds of the cost; 1 year to 2 years would be one third of the cost and a tenancy of 2 years or more would involved no deduction.

Other damage to walls such as minor nicks, marks or small holes from pictures are generally treated as normal wear and tear. However, large marks or paint gouges are the tenant’s responsibility while worn paint behind a sofa is usually seen as normal wear and tear.

What Happens To The Security Deposit When The Building Is Sold?

When a rental property is sold the selling landlord can do one of two things with the security deposits:

1. Transfer the security deposits to the new landlord, or

2. Return the security deposits to the tenants.

The selling landlord can make deductions for the standard reasons and must then transfer the remaining balance to the new owner. The selling landlord must advise the tenants of the transfer and of any amounts deducted and the amounts transferred. The new landlord’s location must be disclosed. This notice must be either hand delivered or mailed by first class mail.

Responsibility for the security deposits is transferred to the new landlord at the time the deposits are transferred. If the selling landlord fails to either return the deposits or transfer them to the new owner then both the new and the old landlords can be held responsible for the deposits.

If the selling landlord has properly accounted to the tenants for deductions and returned the unused balances to the tenants the new landlord may legally collect new security deposits. (Civil Code 1950.5(j))

The subject of security deposits is relatively complex and owners who find themselves confused should not hesitate to consult with an attorney. A landlord who retains a security deposit in bad faith can be held liable for up to twice the amount of the deposit in punitive damages as well as any actual damages the tenant may suffer.

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DISCLAIMER

This article is intended to be a general discussion only, and should not be considered legal or real estate advice. Your use of it does not create either an attorney-client or broker-client relationship. Any liability that might arise from your use or reliance on this article, or any of its links, is expressly disclaimed. This blog is not legal, real estate, loan, accounting or tax advice, and is not to be acted on as such, it was outdated the moment it was written, and is subject to change without notice.  If you are dealing with a potential problem with your investment property you are advised to retain the appropriate licensed professional.