SECURITY DEPOSITS CANNOT BE APPLIED TO FUTURE RENT
California Civil Code § 1950.7 governs security deposits held by non-residential landlords. It requires that security deposit amounts in excess of one month’s rent “shall be returned to the tenant no later than two weeks after the date the landlord receives possession of the premises.” Amounts up to one month’s rent may be held for thirty days after the landlord receives possession. The landlord is authorized to deduct from the deposit only “those amounts as are reasonably necessary to remedy tenant defaults in payment of rent, to repair damages to the premises caused by the tenant, or to clean the premises upon termination of the tenancy” if provided in the lease.
Civil Code § 1951.2 provides that if a tenant abandons the premises, or is evicted, before the end of the term, the landlord may recover the current value of future rent for the balance of the term. The landlord must use reasonable efforts to mitigate this amount. The California Court of Appeal in the case of 250 L.L.C. v. Photopoint Corp., ___Cal.App.4d ____, 2005 DJDAR 9136(July 28, 2005) recently held that this future rent is not authorized by Civil Code § 1950.7 and cannot be deducted from the security deposit no matter how certain it is that this liability will occur. The landlord must deduct only the rent that is due at the time the deposit is refunded in either two weeks or thirty days, as required by the statute.
Thus, if a tenant abandons the premises while still current on the rent, it may be entitled to a full refund of its security deposit even though the premises remains empty for many months in the future.
In 250 L.L.C. v. Photopoint Corp. the landlord security was a cash deposit and a letter of credit which totaled over $900,000, or nineteen months’ rent, because the parties knew that the premises would be difficult to re-rent should the tenant abandon the premises. Indeed, by the time the case came to trial, the landlord’s damages exceeded $1.5 million.
Nevertheless, the court ruled the rent accruing after the landlord should have returned the security deposit in accordance with Civil Code § 1950.7 and was not properly deducted from the security deposit. The landlord had to return almost all of the security deposit to the tenant’s assignee for the benefit of creditors (who has rights and duties similar to a bankruptcy trustee) for distribution to the tenant’s creditors. In other words, the landlord had to share its large security deposit with the tenant’s other creditors.
While 250 L.L.C. v. Photopoint Corp. was a commercial case and relied upon California Civil Code § 1950.7, the logic is equally applicable to residential security deposits governed by California Civil Code § 1950.5. Civil Code § 1950.7, unlike Civil Code § 1950.5, may be waived by commercial tenants. Therefore if a commercial landlord desires deposit, large or small, to be applied to future rent, that agreement must be specified in the lease specifically waiving the contrary provisions of Civil Code § 1950.7. As 250 L.L.C. v. Photopoint Corp. was just decided July 28, 2005, it is unlikely that existing leases contain this language. The most popular commercial form leases distributed by the American Industrial Real Estate Association do not contain language that would allow a security deposit to be applied to future rent. Thus, any landlord who expects to use his security deposit to cover future rent must add special language to the lease.
