New State Law Caps Security Deposits at One Month’s Rent

A California law limiting security deposits to one month’s rent for both furnished and unfurnished units took effect on July 1.

Gavin Newsom signed AB12 in October, which ended the previous regulations, which allowed landlords to charge up to two months’ rent for an unfurnished unit and three months’ rent for a furnished one.

Under those regulations some homes for rent required more than $10,000 deposits before a tenant could move in. 

“The new limit on security deposits is another positive move from lawmakers in Sacramento,” Ryan Bell, Chair of the City’s Rental Housing Board. “Homeless count results have recently come out, and while both Pasadena and Los Angeles’s results show that we may have reached a plateau, if we don’t do everything we can to remove barriers to stable housing, we will see homelessness continue to rise. 

Local voters passed the rent control initiative Measure H.

Under Measure H, rents were rolled back to May 2021 levels. Measure H also limits rent increases and provides safeguards against unjust evictions.

Soon after it passed, the new law faced a legal challenge from the California Apartment Association, which claimed that the measure was an unlawful revision to the City’s Charter. The association claimed that restrictions on who may serve on the Rent Board created to administer the law were unconstitutional and that various provisions of the ordinance were preempted by state law.

In a 35-page ruling issued after the hearing, Judge Mary Strobel rejected a majority of the California Apartment Association’s claims, finding that “Measure H does not fundamentally alter the Pasadena City Charter or the basic structure of city government in Pasadena.”

The California Apartment Association has appealed and the two sides will return to court next month.

“Most tenants do not have three months rent [one month rent plus two month security deposit, or between $7,000-12,000] to get into a lease? The barrier is insurmountable to most families. Limiting security deposits to one month is a good step toward creating more affordability.” 

According to Assembly Matt Haney, who authored the bill, more than half of renters, 53%, indicate that are able to afford their rent but are unable to get an apartment because they are not able to come up with two month’s rent as a deposit.

The new law includes exceptions for small landlords. 

if they own no more than two residential rental properties that collectively include no more than four dwelling units offered for rent.  In addition to owning a limited number of units, the owner must hold the property as a natural person, a limited liability company (in which all members are natural persons), or as a family trust. Under these conditions, small landlords are permitted to collect up to two months’ rent as a security deposit.

Property websites list the median rent in Pasadena between $2,400 and $3,250.

According to those numbers, a security deposit ranging from $4,800 to $6,500 could be required to move into an apartment.

California wouldn’t be the first state to limit security deposits. States like New York and Delaware already have something similar in place.

One local property owner said he was still figuring out the law but had not required security deposits in the past.

The California Apartment Association (CAA) called on property owners to follow the law. 

But while that landlord is seeking more information on the law, efforts to circumvent it have already started.

One attorney sent out an email advising property owners how to continue to get deposits for two months rent.

“Strategy: Assuming you have multiple buildings, all containing four units or less, consider putting each building in a separate limited liability company. In this way you will still be able to collect a security deposit equal to to two months rent.”

“It’s crucial for landlords across California to understand and comply with these updated security deposit regulations,” said Whitney Prout, executive vice president of legal affairs for the California Apartment Association. 

The CAA will host a webinar on the new law on July 30.