Sacramento Limits Security Deposits to One Month’s Rent*
*With caveats!
In recent years our state legislature has chipped away at certain rental housing practices that harm tenants every day. Most recently Assembly Bill 12 took effect on July 1st to bar most landlords from demanding more than one month’s rent for the security deposit. It was intended by legislatures to make renting more financially affordable at the front end. But it also provides a move-out benefit for tenants who would be ripped-off by their unscrupulous landlord: he can keep only one month’s worth of deposit without any justification. Here is what Assembly Bill 12 means for tenants.
The legislature in recent years has taken modest steps to shield tenants from everyday abuses. Excessive screening fees were limited ($62 max in 2024) and this year a landlord may accept a reusable tenant screening report that will save prospective tenants much more. Also this year a landlord may not deny a rental payment made by a third party, like a friend or relative, on behalf of a tenant.
Until AB 12 last year the legislature had not substantially addressed problems with security deposits in many years. That’s overdue! We regularly hear from tenants who report that their unscrupulous landlord simply kept all of their security deposit and then ghosted them. Even more common are improper deductions for expenses related to running a rental housing business, like painting. We call it crime akin to grand theft and larceny but state law says it is a civil offense.
What Does Assembly Bill 12 Say?
Assembly Bill 12 amends Civil Code section 1950.5 (which relates to security deposits) to limit the amount of the security deposit that can be demanded to one month’s rent in most cases. The relevant subsections read in part:
“Except as provided in paragraph (2), (3), or (4), a landlord may not demand or receive security, however denominated, in an amount or value in excess of an amount equal to one month’s rent, in addition to any rent for the first month paid on or before initial occupancy. – §1950.5 (c)(1)
The referenced paragraphs 2 and 3 concern certain instances where additional money may be agreed at lease signing above and beyond the security deposit:
This subdivision does not prohibit an advance payment of not less than six months’ rent if the term of the lease is six months or longer. – 1950.5 (c)(2)
This subdivision does not preclude a landlord and a tenant from entering into a mutual agreement for the landlord, at the request of the tenant and for a specified fee or charge, to make structural, decorative, furnishing, or other similar alterations, if the alterations are other than cleaning or repairing for which the landlord may charge the previous tenant as provided by subdivision (e). – 1950.5 (c)(3)
Prepayment is one means by which a less creditworthy prospective tenant may reassure the prospective landlord of their ability to pay. As for the latter fee or charge, that concerns alterations in which tenant and landlord agree that the landlord will make improvements at the tenant’s expense. That is not part of the deposit as it is non-refundable.
Finally, amendments to Civil Code section 1950.5 in subsection (4)(B) prohibit the landlord from demanding more than one month’s rent in security deposit from service members.
Why is Assembly Bill 12 Good for Tenants?
AB 12 doesn’t address the problem of landlords stealing security deposits but it does at least mitigate the harm by limiting most deposits to one month’s rent. That is inclusive of any pet deposit, key deposit or other refundable security. Security deposits of two months’ rent posed a greater problem for tenants. Because upon signing the lease a tenant would have to put down as much as three month’s rent – perceived by the legislature to be a barrier to affordable renting; and after move-out an unscrupulous landlord could pocket as much as two month’s rent.
That is no hypothetical: several tenants of Beverly Hills landlord Benny Pirian claim he stole their whole deposit and that landlord is no stranger to charges of theft! Pirian was jailed for failing to pay his car wash employees their lawful wages and was also ordered to pay more than a million dollars in restitution.
If that’s the kind of landlord that some tenants have to deal with then the tenant who puts down only one month’s rent in security deposit can rest easier. At the end of their tenancy the landlord only has an opportunity to steal half as much of their money.
Mom-and-Pop Carve-Out
One important aspect of AB 12 is that mom-and-pop landlords may be exempted if the landlord meets a two-part test pursuant to subsection 1950.5(c)(4):
(i) The landlord is a natural person or a limited liability company in which all members are natural persons.
(ii) The landlord owns no more than two residential rental properties that collectively include no more than four dwelling units offered for rent.
Call it a ‘mom-and-pop’ carve-out: the two-part test allows an exempted landlord to continue to demand two months’ rent for the security deposit (except for service members). All others must demand a maximum of one month’s rent.
How to verify that a landlord with a unit on offer actually qualifies for that exemption? That is a challenge because City of Beverly Hills summarily removed all of the names of residential landlords from its public-facing citysmart platform three years ago. There was no good reason to do so. Indeed that effectively impedes a tenant’s ability to assess the prospective landlord.
Carve-Out Examples
The two-part test is seemingly straightforward. Let’s look at some examples. In Beverly Hills it is common that an individual or family trust owns more than one rental property. What would trigger an exemption? If that landlord owns no more than one fourplex or not more than two rental properties in some combination of single-family home, condo, or duplex or triplex. So long as the number of units are four or fewer the landlord may exempt itself (nobody’s checking!).
However if a landlord owns three or more properties, or whose units in two properties number more than four, then the landlord is not exempted and may demand only one month’s rent in security deposit.
The second part of that two-part test is the nature of ownership. Increasingly we see rental properties being controlled by a limited liability company (LLC). So long as individuals are named as the LLC’s managers (not to be confused with a rental property manager) they may qualify for exemption from AB 12. Again that landlord must also own no more than two properties which total no more than four rental units in order to be exempted.
According to secretary of state filings, most LLCs that own rental property in Beverly Hills are managed by individuals rather than a corporation or other LLCs.
But when an LLC owner is managed by another LLC, or managed by a corporation, then that owner will categorically not qualify for the AB 12 exemption, even if they hold four or fewer units, because not all LLC members are natural persons.
From Mom-and-Pop Carve-Out to LLC Loophole?
When is the mom-and-pop exemption a loophole? Take for example the circumstance where a landlord is an individual, or a family trust, that owns a portfolio of rental property but each property ownership is organized as an LLC. Each ‘landlord’ in the eyes of the law is a separate entity; if any of the properties number four or fewer units then it would qualify for an AB 12 mom-and-pop exemption. The property manager at such properties could still demand two months’ rent in security deposit.
That’s no hypothetical. We have families in Beverly Hills like the Migdals who control an extended property empire with each rental property organized as a unique LLC. By our reading of Civil Code 1950.5 the fact that the properties are owned by the same persons is not material. Even though the net operating income from all properties is returned as personal income to those persons, any of the under-four unit properties could qualify for an exemption simply because it is owned through an LLC that holds no other rental property.
For us the value in the mom-and-pop exemption is that it actually defines what is a mom-and-pop in principle even though it doesn’t use that term. Our city council has tied itself in knots trying to define mom-and-pop for the purposes of exemption from local rent control. Now there is a definition to use.
Landlords: “The Sky is Falling!”
AB 12 is a win for tenants in three regards: it reduces the amount of cash a prospective tenant must put down at leas signing; it cuts in half the amount of the deposit that could later be stolen by an unscrupulous landlord; and it effectively halves the interest income on security deposits that are held by landlords over many years. The interest is passive income from the rental business which is unearned.
Perhaps the threat to the interest income is why the Apartment Association of Greater Los Angeles came out swinging last year when AB 12 was moving through the legislature. Landlords would be afraid to rent to prospective tenants without perfect credit. Landlords would see their apartments trashed. “With reduced security deposits and very little ‘skin in the game,’” said the Association’s red alert email, “renters will have little or no incentive to take care of our properties and return them in the condition in which they were rented.”
And of course landlords would simply take their marbles and go home. “Without the ability to collect sufficient security deposits to cover potential damage,” said the red alert email, “rental property owners will likely decide to remove their properties from the rental market.”
The Association also said AB 12 is “bad for renters.” Is it really? AB 12 in most cases will reduce the amount that an unscrupulous landlords can steal from the tenant’s deposit. AB 12 reduces the deposit money available for an unscrupulous landlord’s unlawful deposit deductions.
Our Take: AB 12 is a Win for Tenants
The bottom line is that a tenant who rents from a landlord that is subject to AB 12’s lower security deposit requirement will be putting one-third less cash down when signing the lease; and she will have half as much money in the landlord’s hands that is available for the taking. It’s the difference between the landlord ghosting you instead of returning a $6,000 deposit, say, versus losing only $3,000 (unless the tenant is successful in small claims court).
That tenant can also rest easier for the duration of her tenancy knowing that the landlord is earning only half as much passive interest income from her hard-earned money – perhaps the most egregious of ‘unearned increments’ intrinsic to the rental property business. At least for Beverly Hills landlords because our city does not require the landlord to pay interest to tenants on their money that i held as a security deposit. In Los Angeles and West Hollywood the landlord was already required to pay interest at a rate that is established by each city every year.
AB 12 is good for tenants because when the landlord steals a security deposit the tenant is at a disadvantage: she must sue in small claims court. Here the legislature did us another favor by stepping-up the cap on small claims damages from $10,000 to $12,500. That may be cold comfort when Benny Pirian disappears with your security deposit but it gives a bit more headroom to win those statutory damages to which you are entitled.