Question 1: When I have many rental applicants for a unit, I will select one as the primary ‘winner’ of the unit, but let at least two to three others know they are acceptable but are on a wait list. In those circumstances, I would like to require the winning applicant to immediately submit a non-refundable deposit to ‘hold’ the unit for them, in case they decide to not take the unit but before they have signed the lease. Is this allowed?
Answer 1: Non-refundable deposits are ‘tricky’ in the sense that it is not completely clear whether such deposits are covered under the law of security deposits or not. If they are, then Civil Code Section 1950.5, which governs security deposits, prohibits considering any part of the deposit as “non-refundable.” However, one suggestion is to require the applicant’s signature to the lease and payment of the initial rent and security deposit at the time the applicant is offered the opportunity to rent the unit. If the applicant does that, and then – for whatever reason – decides not to rent, the owner is legally entitled to withhold from the total amount deposited an amount not to exceed 21 days’ of rent, if the landlord incurred rental income or re-leasing costs up to that amount.
If the landlord’s losses from not being able to rent the unit quickly to a new tenant exceeded 21 days’ of rental value, the landlord’s only recourse is to sue for the additional losses, in small claims court or ‘regular’ superior court if the amount was great enough.
The California Department of Consumer Affairs publishes an annual residential landlord-tenant Guide that addresses many landlord-tenant issues. While written for the ‘consumer,’ which may be interpreted as the tenant, it appears to be a reasonably neutral and well researched source for landlord tenant issues. Below is the guide’s explanation of non-refundable deposits. The booklet can be found online at dca.ca.gov.
“Sometimes, the tenant and the landlord will agree that the tenant will rent the unit, but the tenant cannot move in immediately. In this situation, the landlord may ask the tenant for a holding deposit. A holding deposit is a deposit to hold the rental unit for a stated period of time until the tenant pays the first month’s rent and any security deposit. During this period, the landlord agrees not to rent the unit to anyone else. If the tenant changes his or her mind about moving in, the landlord may keep at least some of the holding deposit.
Ask the following questions before you pay a holding deposit:
- Will the deposit be applied to the first month’s rent? If so, ask the landlord for a deposit receipt stating this. Applying the deposit to the first month’s rent is a common practice.
- Is any part of the holding deposit refundable if you change your mind about renting? As a general rule, if you change your mind, the landlord can keep some – and perhaps all – of your holding deposit. The amount that the landlord can keep depends on the costs that the landlord has incurred because you changed your mind-for example, additional advertising costs and lost rent.
You may also lose your deposit even if the reason you can’t rent is not your fault – for example, if you lose your job and cannot afford the rental unit.
If you and the landlord agree that all or part of the deposit will be refunded to you in the event that you change your mind or can’t move in, make sure that the written receipt clearly states your agreement.
A holding deposit merely guarantees that the landlord will not rent the unit to another person for a stated period of time. The holding deposit doesn’t give the tenant the right to move into the rental unit. The tenant must first pay the first month’s rent and all other required deposits within the holding period. Otherwise, the landlord can rent the unit to another person and keep all or part of the holding deposit.
Suppose that the landlord rents to somebody else during the period for which you’ve paid a holding deposit, and you are still willing and able to move in. The landlord should, at a minimum, return the entire holding deposit to you. You may also want to talk with an attorney, legal aid organization, tenant-landlord program, or housing clinic about whether the landlord may be responsible for other costs that you may incur because of the loss of the rental unit.
If you give the landlord a holding deposit when you submit the rental application, but the landlord does not accept you as a tenant, the landlord must return your entire holding deposit to you.”
Question 2: If I transfer title of my rentals from Joint ownership or living trust ownership into an LLC, does this require permission from my bank which holds the mortgage? Also, is it better to have separate LLC’s for each property or just hold all properties in the same LLC??
Answer 2: In answer to your first question, most loan documents have a ‘due on sale’ provision which means that if you transfer your ownership interest in the property secured by a deed of trust, the lender (if it finds out) can ask for immediate repayment of the entire loan amount. Transfer from an individual to a revocable living trust should not have this effect, but you should consult with the holder of your loan or a qualified estate planner on that item.
Whether or not to form one or more LLCs for the purpose of holding property is a pretty detailed consideration, and not one really suitable for consideration in this type of forum. Basically, an LLC (limited liability company) acts like a corporate entity, in that it removes personal ownership from an individual and places it in an entity. The most commonly considered benefit of this arrangement is that the ‘individual’ owner (yourself in this case) is not personally liable for a judgment against the LLC. For example, if you were the property owner, and the tenant was injured on the property as a result of some negligence on your part, or the part of your property manager, you would (absent some unusual factor) be personally liable for the tenant’s injuries. If those injuries were significant, and exceeded your insurance coverage, then your personal assets could be seized to pay the judgment. If, on the other hand, the property were owned by a properly formed LLC, and was in the hands of a property management company, an injury to the tenant would not be your personal responsibility (unless you personally committed the negligent act that injured the tenant). That may or may not be clear, which is why it’s a concept best explained by your personal advisor in detail.
Question 3: I have units in San Francisco and have a tenant that signed a lease in 1989 with a $595.00 security deposit which was the rent at that time. Can I ask the tenant to increase the deposit to the current amount of rent?
Answer 3: Increasing security deposits for rent controlled tenants is not clearly allowed or prohibited, as the law is unclear. An argument can be made that it is not allowed. This is based on the language of the rent ordinance that considers any money paid by the tenant in connection with the initial rental to be part of the ‘base rent’, and any increase in the base rent must conform to the amounts permitted by the rent increase limitations. Rent increases are defined to include any additional amounts demanded by the landlord or paid by the tenant in connection with the rental of the unit, which would, it seems, include a requested increase in security deposits. However, the rent board itself takes the position that this is an issue handled by state law, which indicates that an increase in the deposit to reflect rent increases over time would not be opposed by the rent board, which would likely be the forum to hear such disputes.
Question 4: In a short sale situation, is there any law that says that a tenant does not have to pay rent while the property is undergoing a short sale? We have a tenant that is claiming this. We will be serving the tenant with a 3-day notice to pay rent (using the AOA form for Oakland) and beginning eviction proceedings if they do not pay rent within the time frame specified in the 3-day notice.
Answer 4: Your instincts are correct – a short sale or a foreclosure process does not excuse the tenant’s legal obligation to pay the rent. If you properly serve a properly worded 3 Day Notice (and have complied with the Oakland rent ordinance requirement of providing the tenant with the notice of his or her rent control rights), and unless the tenant has some other legal defense, your eviction action should be successful if the tenant fails to pay the demanded amount of rent.
Question 5: I have a house I rent to primarily college students. When they move out they never seem to clean up enough so I hire a maid service to do the move-out cleaning. This comes out of the damage deposit since they did not leave the place in the same condition as when they moved in (professionally cleaned before they move in). Presently I have the following clause in the lease:
g) At the end of the Agreement term, Resident shall clean the premises at Resident’s cost and expense in accordance with the Premises inspection report, including cleaning of the carpet and rented furniture by licensed professionals. Resident shall then surrender the premises to Owner broom clean and in the same condition as when received, except for ordinary wear and tear.
I would prefer to hire the maid service myself and then charge the tenants out of the security deposit for the costs. Can I state that the owner will have the house professionally cleaned at the end of the lease and that the tenant is responsible for having the house in broom clean condition?
Answer 5: I don’t think you can preemptively charge the tenants for cleaning, since the statute that governs security deposits provides that a deduction can be made to pay for “The cleaning of the premises upon termination of the tenancy necessary to return the unit to the same level of cleanliness it was in at the inception of the tenancy.” In other words, if the tenants left it as clean as they found it, there would be no basis to deduct from their security deposit, and I don’t think the statute (which is for the protection of both parties) can be waived in a residential lease. You might be able to give the tenants the option, with a fixed price for the cleaning, sort of like the rental car companies do with gas (return it full or pay the difference, or pay for the gas in the tank and bring it back empty if you want). That might pass muster, in the event some tenant decided to challenge your proposed lease provision.
Question 6: We have discovered our tenants have two dogs. We are asking them to move as the dogs are not allowed. We have a lease in place that expires on September 30, 2013.
Unfortunately, we do not have any signatures of any of the lease pages from the tenants.
They say they will move, but will not pay the rest of the lease off. Can we enforce the lease without tenant signatures?
Answer 6: If the terms of the lease were agreed upon, and both sides agreed the lease that was prepared was the terms of the agreement, it is not a legally fatal flaw that you did not get the lease signed (as long as it was not for a period over one year). However, the problem will be proving that both sides agreed the written but unsigned lease was in fact the final agreed terms of the tenancy. If so, and the lease prohibits pets, you can serve the standard three day notice to cure lease violation or quit the premises. If you are unable to establish that you do have a binding lease, then the agreement is likely month to month, meaning the tenants can move on 30 days notice without further liability for rent.
So, all in all, sounds like a good time to start fresh, with new tenants, and a greater concentration on making sure you complete your paperwork this time.
Richard Beckman, of Beckman Blair, LLP has been practicing landlord-tenant law for over 19 years, primarily in rent-controlled jurisdictions such as San Francisco, Oakland and Berkeley. He represents clients in a broad range of real estate-related disputes, including partition of co-ownership interests, purchase contract disputes, insurance coverage analysis and land use. Mr. Beckman also specializes in all aspects of landlord-tenant issues, representing landlords and tenants in residential and commercial matters. He can be reached at 415-871-0070; email [email protected] or by visiting the website www.beckmanblairllp.com.