The maximum security deposit a landlord can ask for in California is about to change. There is a new law, Assembly Bill 12, which takes effect starting July 1, 2024. AB12 states a rental property owner cannot demand or receive a security deposit in an amount that exceeds one month of rent.
Exception – you are permitted to have up to two months’ rent as a security deposit, if:
- The landlord is a natural person or a limited liability company in which all members are natural persons.
- The landlord owns no more than two residential rental properties that collectively include no more than four dwelling units offered for rent.
For example, if you or one of your business partners in a property owns a duplex and a triplex then you have five units and don’t qualify for the exception.
This exception does not apply when the tenant is an active service member. The maximum security deposit allowed for active service members is always one month’s rent, without exception. Please remember, that it is against the law to discriminate against an active service member because of this requirement.
What about Security Deposits already held?
The law only applies to new security deposits obtained after July 1, 2024. Any deposits lawfully obtained before Assembly Bill 12 goes into effect can remain as is.
What about Furnished Properties?
This law applies to furnished and unfurnished properties alike. There used to be a three-month security deposit limit for furnished properties but not anymore. Now furnished and unfurnished are treated the same.
What about Pet Deposits?
A “pet deposit” is still a deposit and included in the one-month or any other applicable limit. After all, a “pet deposit” is still just a deposit but with a stipulation that it may only be used for damage caused by a pet. If there is ever a situation where you are collecting this kind of deposit, call it an “additional deposit”. Of course, the limits still will apply. We can discuss this more in another blog.
Can you charge the First and Last Month’s Rent?
You can certainly charge the first month’s rent upfront, you have to. However, you cannot charge the “last month’s” rent upfront and hold it separate from the security deposit as rent. If you did, it would be considered part of the “security deposit” yet you would be putting a stipulation on it that it could only be used for the last month’s rent. It would also go towards your AB12 limit. This would be a bad idea. Long gone are the days of charging “First and Last Month’s” rent plus security deposit upfront in the state of California.
Are there ways to work around the AB12 limits?
Every time a new law goes into effect, there are people with creative minds who naturally try to find ways around it. Although creativity is generally a good thing, we strongly recommend that you follow the law and use your creative energy more productively.
California Security Deposit Laws are something the state takes seriously with very specific rules that landlords must follow. Remember this: the security deposit is the tenant’s money. It is held in trust just in case something goes wrong.
Professionally managed properties have security deposits held in noninterest-bearing trust accounts, which are subject to stringent Department of Real Estate Rules. The only way the funds should ever end up ultimately going to the property owner is if the tenant owes unpaid rent. Otherwise, any money not returned would go to vendors who repair or clean the property. If you are a rental property owner holding deposits, you must keep this in mind.
How will AB12 affect the rental market?
AB12 will only help speed up the trend in lower security deposits. If you qualify for the “exception” of the one-month limit and qualify for holding up to two months' security deposit, you will still be in a market where most landlords will be limited to holding a maximum of one month’s rent.
Therefore, you will be at a competitive disadvantage if you try to hold more. Why would you do that? Maybe to accommodate someone with a greater than average credit risk. Well, a little extra deposit won’t matter much if something goes wrong. That higher move-in cost may be scaring away your most qualified tenants. So really, there is no point.
We are seeing the larger more sophisticated rental property owners with big apartment communities and large portfolios ask for lower security deposits. This reduced deposit gives them the competitive advantage of lower move-in requirements for the tenant. That way they can fill their vacancies faster and even potentially achieve higher rents.
Bottom Line
AB12 will change the amount of security deposit a California landlord can require to no more than one month’s rent. There is an exception allowing a maximum of two months’ rent for landlords who are natural people owning no more than two residential rental properties with collectively no more than four units. This only applies to deposits taken after July 1, 2024. These rules are the same for furnished or unfurnished properties. There is no exception for “pet deposits” or “last month’s rent”. Don’t try to get around this law. You need to follow the law and don’t forget the deposit belongs to the tenant. Most landlords will be asking for a max of one month with many of the bigger ones asking for less. So don’t put yourself at a competitive disadvantage.
In Conclusion
This is not in any way an attempt to give legal advice. You should consult an attorney for that. There is a lot involved with the laws regarding security deposits, especially in California. As you can see, these laws are always changing. In addition, many local Counties and Cities have y laws that supersede the state laws.
For legal advice, especially regarding a specific situation, we recommend that you seek advice from an attorney specializing in landlord-tenant law in the local area where your property exists.
Of course, at the Mike Dunfee Group, we would be happy to discuss any of your property management and real estate brokerage needs in the Long Beach, Los Angeles, and Orange County areas. We are happy to help.
Dunfee Real Estate Services, Inc.
DRE # 02026232
