Landlords need financial protection in case a tenant damages a unit. You should have insurance, but you have deductibles to pay, and too many claims will boost your premium. A security deposit provides a financial cushion, but its use is limited. It’s not an extra pile of cash you can use as you see fit.
What is a Security Deposit? How Can It Be Used?
State statute (Cal. Civ. Code § 1950.5) covers security deposits and how a residential landlord can apply them. “Security” includes any fee, deposit, payment, or charge due at the start of the tenancy. It’s to reimburse you for any purpose, including the costs of processing a new tenant, an advanced payment of rent, or:
• Payment for unpaid, past due rent
• Repairing damage, but not for ordinary wear and tear caused by the tenant, a guest, or someone invited onto the property
• Cleaning the premises after a tenancy ends so it’s as clean as when it started
• To remedy future tenant defaults of any obligation under the lease agreement to return, place, or restore personal property or equipment, exclusive of ordinary wear and tear
You can see the common theme. Security deposits are not to cover the costs of wear and tear. But there’s nothing to stop you from factoring into your monthly rental fee your expected costs of repairing or replacing what’s worn and torn over time.
What are Liquidated Damages in a Contract for Real Property?
Damages in contract law are the financial harm done after a breach. You rely on someone for something. They make an agreement with you and later fail to follow through. The losses you suffer are your damages. Contract damages are not like those in a personal injury case, which can include compensation for physical and mental pain, suffering, and anguish.
Liquidated damages put a value on a contractual loss that’s unexpected and hard to estimate ahead of time. When such a clause is part of an agreement, both parties agree compensation for the loss will come from the security deposit.
Can a Security Deposit be Used as Liquidated Damages in a Contract for Real Property?
State statute (Cal. Civ. Code § 1671) covers liquidated damages in contracts generally, plus there’s a subsection applying just to residential leases, which states in part:
“…a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.”
Translated into English, this puts the general rule into state law. You can use a security deposit as compensation for some kind of harm that can’t be anticipated or easily estimated at the start of the lease.
If your past tenants, over time, consistently damage or destroy some part of your property, its loss is predictable, and you should have a good idea of its repair or replacement cost. A security deposit shouldn’t be used under these circumstances because it’s essentially wear and tear, not something unexpected or unusual. This cost is part of your overhead and should be factored into the rent you charge.
We’re Here to Help
If you’re a residential landlord and have questions about security deposits or believe you’ll need representation in litigation involving one, call Anthony Burton at (949) 244-4207 or complete our online contact form today.
