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New law could change security deposits practices for landlords

On Behalf of | Oct 25, 2023 | Real Estate

A significant shift is on the horizon for real estate business owners in California. The newly signed law (Assembly Bill 12) by Governor Gavin Newsom could dramatically alter the scenario for property owners. This law reshapes the landscape around security deposits for rental properties. Under the previous law, landlords could request a security deposit of up to two months’ rent for an unfurnished property and up to three months’ rent for a furnished one.

Previously, landlords could use this deposit to cover unpaid rent, conduct repairs or clean the unit after the tenant leaves. They also had to inspect the property before the tenant moved in and document any costs within 21 days of the tenant leaving.

But now, things are going to change.

One-month limit on security deposits

Under the old and new laws, landlords can use the security deposit to cover the owed amount if a tenant fails to pay rent. However, under the new law, the reduced security deposit may not be enough to cover these costs. AB 12, signed into law on Oct. 12, 2023, limits the security deposit to one month’s rent for most rental units–regardless of whether they are furnished.

However, there are positive aspects to this law. Californians can expect this change to lower the initial costs for individuals moving into a new property, potentially widening the pool of prospective tenants.

Exceptions for small landlords

AB 12 has some exceptions, primarily for small landlords. The law defines small landlords as those owning no more than two rental properties that collectively include four rental units. Additionally, the owner must hold the property as an individual, a limited liability company (where all members are individuals), or as a family trust.

Under these conditions, small landlords can still request up to two months’ rent as a security deposit. This exception doesn’t apply to prospective tenants who are military service members.

Brace for impact

This new law will take effect on July 1, 2024, providing landlords ample time to adjust their practices. The California Apartment Association (CAA) will provide compliance materials and updated forms to assist landlords in navigating these changes.

As they anticipate the impact of this new law, landlords must familiarize themselves with the changes and adjust their security deposit practices accordingly. Staying informed is staying ahead.