BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



           ----------------------------------------------------------------- 
          |SENATE RULES COMMITTEE            |                        SB 603|
          |Office of Senate Floor Analyses   |                              |
          |1020 N Street, Suite 524          |                              |
          |(916) 651-1520         Fax: (916) |                              |
          |327-4478                          |                              |
           ----------------------------------------------------------------- 
           
                                           
                                    THIRD READING


          Bill No:  SB 603
          Author:   Leno (D)
          Amended:  4/29/13
          Vote:     21

           
           SENATE JUDICIARY COMMITTEE  :  4-1, 5/7/13
          AYES:  Evans, Corbett, Leno, Monning
          NOES:  Anderson
          NO VOTE RECORDED:  Walters, Jackson


           SUBJECT  :    Landlord and tenant:  security deposit

           SOURCE :     California Rural Legal Assistance
                      Tenants Together
                      Western Center on Law and Poverty


           DIGEST  :    This bill mandates a statutory damage equal to the  
          amount withheld from a deposit when a landlord improperly  
          withholds any portion of a deposit, regardless of a showing of  
          bad faith.  This bill also requires landlords to (1) keep  
          deposits in accounts in institutions that are protected by  
          federal deposit insurance, (2) notify a tenant of the location  
          of the deposit (failure to do so creates a rebuttable  
          presumption that the landlord acted in bad faith), (3) to pay  
          the accrued interest from security deposits to tenants at the  
          end of tenancy (failure to pay interest subjects a landlord to  
          actual damages plus interest if improperly withheld.  Where bad  
          faith is shown, an improper withholding of interest entitles a  
          plaintiff to actual damages plus twice the amount of the  
          interest improperly withheld.)  This bill does not apply to any  
                                                                CONTINUED





                                                                     SB 603
                                                                     Page  
          2

          city, county, or city and county that requires the payment to  
          tenants of security deposit interest.

           ANALYSIS  :    

          Existing law:

          1. Regulates the landlord-tenant relationship, including the  
             return of any security deposit provided by the tenant.

          2. Permits the landlord to only claim amounts from that deposit  
             which are reasonably necessary for specified purposes.  Those  
             purposes include compensating for a tenant's default in  
             payment of rent, repair of damages to the premises (exclusive  
             of ordinary wear and tear), and cleaning the premises, as  
             specified. 

          3. Provides that no later than 21 calendar days after the tenant  
             has vacated the premises, as specified, the landlord shall  
             furnish the tenant with a copy of an itemized statement  
             indicating the basis for, and the amount of, any security  
             received and the disposition of the security and shall return  
             any remaining portion of the security to the tenant. 

          4. Provides that the bad faith withholding of a security deposit  
             subjects the landlord to statutory damages of up to twice the  
             amount of the security deposit, in addition to actual  
             damages.  In any action for recovery of the security, the  
             landlord has the burden of proof as to the reasonableness of  
             the amounts claimed. 

          This bill:

          1. Mandates that a court award statutory damages of not less  
             than the amount of the security deposit which was withheld,  
             if a tenant shows that a landlord improperly withheld all or  
             a portion of a security deposit. 

          2. Requires landlords to deposit security deposits in an account  
             established and maintained solely for the purpose of holding  
             security deposits.  The account must be at an institution  
             that is insured by the federal government. 

          3. Requires landlords to notify tenants, in writing, of the name  

                                                                CONTINUED





                                                                     SB 603
                                                                     Page  
          3

             and address of the financial institution where the account is  
             established within 20 days of receiving a security deposit,  
             and provides that failure to deposit security deposits in a  
             federally insured account or notify the tenants of the  
             location of that account within 20 days creates a rebuttable  
             presumption of bad faith. 


          4. Requires landlords to pay tenants interest on the security  
             deposit at the termination of tenancy, in a payment separate  
             from the underlying security deposit.  Interest would be  
             calculated based on the Federal Reserve six month certificate  
             of deposit rate of the preceding calendar year.  This bill  
             additionally requires that a tenant receives his/her interest  
             payment: 

                 at the time when the notice of initial inspection is  
               required to be provided to the tenant, as specified; or
                 when the itemized statement indicating the disposition  
               of the security deposit is due, whichever is earlier. 

          5. Provides that if a tenant has not received a security deposit  
             interest payment within the timeframe specified above, the  
             tenant shall be entitled to statutory damages in the amount  
             of actual damages plus the amount of interest withheld, and  
             further provides that if bad faith withholding is shown, the  
             tenant is entitled to actual interest plus twice the amount  
             of the interest withheld. 

          6. Requires landlords to notify tenants of each tenant's right  
             to annually receive interest on his/her security deposit.   
             Authorizes notice to tenants in the following methods: 
                 posting a notice at a conspicuous location within the  
               residential premises; 
                 providing written notice at the time of entering into a  
               lease or rental agreement; or
                 sending a written notice to the tenant by first class  
               mail. 

          7. Exempts cities and/or counties that require interest payments  
             to tenants based on their security deposits from the  
             provisions of this bill, and makes technical and clarifying  
             changes.


                                                                CONTINUED





                                                                     SB 603
                                                                     Page  
          4

           Background
           
          California law regulates various aspects of the relationship  
          between residential landlords and tenants, including the  
          collection and return of the security deposit.  Those deposits  
          cannot be greater than two months' rent for unfurnished  
          properties, or three months' rent for furnished residential  
          properties.  Landlords are only allowed to claim amounts from  
          the security that are reasonably necessary for specified  
          purposes (such as repairing damages exclusive of ordinary wear  
          and tear), and must return any remaining portion of the deposit  
          within 21 days after the tenant has vacated the premises.  

          AB 2330 (Midgen, Chapter 1061, Statutes of 2002) further  
          protects tenant's rights by requiring a landlord to notify the  
          tenant in writing of the tenant's option to request an initial  
          inspection upon notice of the termination of a lease and the  
          tenant's right to be present at the inspection.  That bill also  
          provided that a tenant must have the opportunity to remedy  
          identified deficiencies, as specified, during the period  
          following the initial inspection until the end of the tenancy.   
          That bill changed the amount of statutory damages for bad faith  
          violations from $600 to twice the amount of the security.

          Despite laws outlining how security deposits should be managed,  
          the Department of Consumer Affairs notes that "[t]he most common  
          disagreement between landlords and tenants is over the refund of  
          the tenant's security deposit after the tenant has moved out of  
          the rental unit."

           Prior legislation
           
          AB 2330 (Migden, Chapter 1061, Statutes of 2002) among other  
          provisions, redefined security, required specified landlords to  
          notify tenants of their option to request an initial inspection  
          and the tenant's right to be present at the inspection.  The  
          bill changed the amount of statutory damages for certain  
          violations from $600 to twice the amount of the security. 


           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  No   Local:  
           No

           SUPPORT  :   (Verified  5/9/13)

                                                                CONTINUED





                                                                     SB 603
                                                                     Page  
          5


          California Rural Legal Assistance (co-source)
          Tenants Together (co-source)
          Western Center on Law and Poverty (co-source)
          Asian Law Caucus
          Bet Tzedek Legal Services
          California Alliance for Retired Americans
          California Reinvestment Coalition
          Causa Justa :: Just Cause
          Coalition for Economic Survival
          Courage Campaign
          Eviction Defense Collaborative
          Housing and Economic Rights Advocates
          Housing Rights Committee of San Francisco
          Isla Vista Tenants Union
          Law Foundation of Silicon Valley
          National Housing Law Project
          Santa Barbara Rental Housing Roundtable
          Santa Monicans for Renters' Rights
          Tenderloin Housing Clinic
          Unite Here

           OPPOSITION  :    (Verified  5/9/13)

          Apartment Association, California Southern Cities
          Apartment Association Greater Los Angeles
          Apartment Association Orange County
          California Apartment Association
          California Association of Realtors
          East Bay Rental Housing Association
          Leading Age California
          Lighthouse Commercial Property Management
          NorCal Rental Property Association
          Ramirez Residential Properties, LLC
          San Diego County Apartment Association
          Santa Barbara Rental Property Association

           ARGUMENTS IN SUPPORT  :    According to the author's office,  
          security deposits continue to be perhaps the single most  
          recurring source of conflict between landlords and tenants.   
          Many tenants are simply resigned to getting little or nothing  
          back on their deposits, which are only supposed to be used for  
          damage to the unit, rent left owing, or cleaning to bring the  
          unit up to the level of cleanliness when the unit was rented.   

                                                                CONTINUED





                                                                     SB 603
                                                                     Page  
          6

          The law allows deduction only for "damage" beyond ordinary wear  
          and tear.

          Another problem has been exacerbated by the foreclosure crisis.   
          Landlords are not required to hold deposits in any particular  
          form.  Tenants are unable to recover deposits from bankrupt  
          landlords.  As a corollary, even though the deposits are the  
          tenants' property, no interest is required to be paid.  It is  
          conservatively estimated that landlords hold $5 billion in  
          tenant deposits statewide.  The income from the deposits is kept  
          by the landlords.

           ARGUMENTS IN OPPOSITION :    The California Apartment  
          Association, argues that "by requiring judges to award mandatory  
          penalties for any de minimis error, SB 603 would create a very  
          strong incentive for every tenant to sue property owners."  
           
           They further state, "Under SB 603, a property owner who simply  
          forgets or does not know that they need to ? deposit the  
          tenant's security deposit in a federally insured financial  
          institution, or does not disclose to the tenant timely or  
          correctly the location of the deposit is considered to have done  
          so in "bad faith."  As a result, he or she is in violation of  
          the law and may be subject to TWICE the amount of the security  
          deposit, plus actual damages."

          AL:d  5/9/13   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

                                   ****  END  ****
          













                                                                CONTINUED