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