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Security Deposits

After 2002, laws and regulations about residential tenants' security deposits became more complicated. Here is a review of them.

To begin a tenancy, a landlord may collect the first month's rent plus a security deposit. That deposit may not be more than two months' rent, unless the unit is furnished. In that case, the deposit may equal three months' rent. These monetary limits apply to the total of all sums collected at the outset of the tenancy, regardless of what these are called (i.e., security deposit, key deposit, cleaning deposit, cleaning fee, last month's rent deposit, pet deposit, or other terms). However, if the initial term of the lease exceeds six months, the landlord may also accept prepaid rent for six months or more.

If the tenant intends to use a water bed, the landlord may collect an additional deposit equal to one-half a month's rent, plus a fee to cover reasonable administration costs. The only other exception to the deposit sums ceiling is that landlords may collect a nonrefundable fee to cover the out-of-pocket cost for tenant application screening and credit reports. That fee is not considered a deposit. Other than the application screening fee, all deposits must be refundable, and may not be labeled "nonrefundable."

You may not collect an additional deposit for a disabled tenant's guide, service, or signal dog. However, the tenant will remain responsible for any damage caused by the animal.

You may charge an additional deposit if the tenant operates a family day care home, but no more than the maximum amount otherwise allowed under the rules described above.

Designate the tenant's deposit as a "security deposit," and not as "last month's rent deposit." If the deposit is labeled as "last month's rent," then you will have contractually determined the last month's rent in advance, even if the rent has increased substantially by the time the tenant moves out.

If the unit is rent-controlled, you may lawfully provide in your rental agreement that the security deposit will increase proportionately to reflect the lawful annual rent increases and any other increases allowed under the rent-control ordinance. We recommend that you include a security-deposit escalation clause in your written tenancy agreement.

San Francisco landlords are required to pay tenants interest annually on all security deposits held for more than one year. The Rent Board publishes the interest rate annually: for the period from March 1, 2008, through February 28, 2009, the rate is set at 5.2%. The amount is due and payable on the tenant's anniversary date (unless the tenancy started before 9/1/83, in which case, it is due on every first day of September.) Landlords may deduct 50% of the annual Rent Board fee for each unit from the annual interest payment to the tenant. (The Rent Board fee also varies from year-to year.) For further information, check the San Francisco Rent Board's website, "Fact Sheet 3" (sfgov.org/site/rentboard).

There is a common misunderstanding that the interest on security deposits is not due until the tenant vacates. Not only is this untrue, it could create a financial hardship for the landlord because the accrued amount payable and overdue could be quite large.

At the conclusion of a tenancy, the landlord must allow the tenant an opportunity to remedy any defects in the condition of the premises that would otherwise result in deductions from the security deposit. The landlord must give written notice of the tenant's right to a pre-move out inspection to occur no earlier than two weeks before the move-out date. The inspection should occur only after 48 hours advance written notice, unless the tenant waives this requirement. The tenant has the right to be present at the inspection, and must be notified of that right. If the tenant wishes to be present, the inspection should occur at a mutually convenient time

If problems are found, the landlord must provide the tenant with an itemized statement specifying the proposed deductions for repairs and/or cleaning, and it must include the text of Civil Code §1950.5(b)(1)-(4):

"(b) As used in this section, "security" means any payment, fee, deposit or charge, including, but not limited to, any payment, fee, deposit, or charge, except as provided in Section 1950.6, that is imposed at the beginning of the tenancy to be used to reimburse the landlord for costs associated with processing a new tenant or that is imposed as an advance payment of rent, used or to be used for any purpose, including, but not limited to, any of the following:

(1) The compensation of a landlord for a tenant's default in the payment of rent.

(2) The repair of damages to the premises, exclusive of ordinary wear and tear, caused by the tenant or by a guest or licensee of the tenant.

(3) The cleaning of the premises upon termination of the tenancy necessary to return the unit to the same level of cleanliness it was in at the inception of the tenancy. The amendments to this paragraph enacted by the act adding this sentence shall apply only to tenancies for which the tenant's right to occupy begins after January 1, 2003.

(4) To remedy future defaults by the tenant in any obligation under the rental agreement to restore, replace, or return personal property or appurtenances, exclusive of ordinary wear and tear, if the security deposit is authorized to be applied thereto by the rental agreement."

If the tenant is being evicted based on a 3-day notice, the landlord does not need to give notice of a pre-move out inspection.

Landlords may use the deposit only for limited purposes, i.e., those amounts reasonably necessary: 1) to remedy tenant's rent default; 2) to repair damage caused by the tenant or tenant's guests exceeding ordinary wear and tear; 3) for cleaning to return the premises to the same level of cleanliness as it was at the inception of the tenancy; and, 4) to restore, replace, or return personal property or appurtenances, but only if pre-authorized in the written rental agreement, and beyond ordinary wear and tear.

The security deposit must be accounted for and any unused amount refunded within 21 days after the tenant vacates the unit. This is an important, mandatory deadline. Landlords should provide a written accounting within the 21-day period even if some of the deductions are only estimates. If the landlord fails to comply with this deadline, then the landlord must return the entire deposit without deductions. In this event, any charges against the tenant might have to be sorted out in small claims court.

Along with the itemized statement of deductions from the security deposit, the landlord must include copies of documents showing charges incurred, such as receipts and invoices for cleaning and repairs. The landlord must itemize the time and reasonable hourly charges for any work performed personally. For work performed by others, the landlord must include the worker's contact information, unless it already appears on the invoice or receipt. If the work cannot reasonably be completed within 21 days, the landlord may deduct the amount of a good-faith estimate of any future charges, and itemize the estimated amount on the tenant's statement. If the amount of the charges must be estimated because the landlord has not yet received documentation from the service provider, then the tenant must be given the service provider's contact information. The landlord must follow up with a subsequent statement of the actual charges within 14 days after the work is completed or the documentation provided.

All statements must be mailed to the address provided by the tenant, or, if none is provided, to the address of the unit that has been vacated (so that the mail may be forwarded.) The landlord is not excused from these reporting requirements if the tenant did not provide a forwarding address. The landlord may be subject to court-imposed penalties for any "bad-faith" retention of the security deposit. To avoid such problems, the landlord should comply with the pre-move out inspection rules and deduct only such amounts as are reasonably necessary.