Avoiding CA’s New Security Deposit Limitations (AB12)

[Paul T.]

Nothing herein is legal advice.

Effective July 1, 2024, California Civil Code section 1950.5 generally prohibits a landlord from collecting more than one month’s rent as security deposit, whether the rental is furnished or not. However, the statute provides for exceptions that are important for CA landlord’s to understand.

First, the statute expressly states that the one month limitation does not apply to rental agreements entered into before July 1, 2024, so if you have an existing security deposit of two or three times the monthly rent, you do not have to reduce that security deposits to comply with the new law. In addition, the statute does not prohibit you from increasing your security deposits for new tenants between now and July 1, 2024, or even for existing tenants before July 1, 2024.

Second, nothing in the statute prohibits a landlord from requiring and increase in the security deposit, each time the landlord increases the monthly rent, provided the security deposit does not exceed one month’s rent.

Third, a landlord may still require two month's rent as security deposit, after July 1, 2024, if the landlord has no more than two residential dwelling properties that include no more than four dwelling units. So if the landlord only owns one four-plex, or two duplexes, or a single and triplex, and the landlord is a natural person (not a corporation or partnership), or the landlord is an LLC in which all members are natural persons (no corporate or partnership members in the LLC), the landlord can still require two month's rent as security deposit.

So for those CA investors who invest in properties with four rentals or less, and place each rental property into its own LLC, and the LLC members are all natural persons, those investors can continue to require two month's rent as security deposit. So long as each LLC does not own more than two residential dwelling properties, or more than four dwelling units total, the LLC may require two month's rent as security deposit.

Although elsewhere I have expressed the opinion that placing each rental unit into its own LLC is maybe not necessary for limiting liability, if an investor is subject to the new security deposit limitations, the idea of limiting the number of dwelling units in any LLC to four rental units, now has an added benefit of allowing the LLC to require higher security deposits.

Below is the pertinent portion of the statute:

(4) (A) Notwithstanding paragraph (1), a landlord may not demand or receive security, however denominated, in an amount or value in excess of an amount equal to two months’ rent, in addition to any rent for the first month paid on or before initial occupancy if the landlord meets both of the following requirements:

(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.