A California court recently ruled that a tenant can force a landlord to apply some of its security deposit toward an “early termination fee” if that tenant offers part of the fee upfront along with the deposit and the landlord accepts the partial payment. This is a departure from the normal rule about security deposits because normally landlords have the right to reserve the whole deposit to apply toward other damages (like damage done to the property) and tenants are responsible to pay rent and fees aside from the security deposit.

Security Deposits

Landlords collect security deposits to insure against damages that might be sustained during the tenancy. Ideally, security deposits are held by the landlord throughout the tenancy and are applied as necessary at the end of the term to repair damage to the property. The landlord also usually has the right to apply some of the security deposit to cover unpaid rent and fees that remain after conclusion of the tenancy. The tenant is always due reasonable notice of how the security deposit is being used and the tenant always has the right to object. However, the landlord has the right to initially apply the deposit as he deems necessary.

In the case of back rent and fees, the landlord normally would have the right to pursue these debts directly from the tenant and the landlord could hold the security deposit to apply as necessary to cover other damage done to the property. Most leases explicitly forbid the tenant from directing the landlord to apply the security deposit to cover rent and charges because that would effectively decrease the amount of security the landlord has to protect and repair his property.

Gould v. Corinthian Colleges, Inc. (2011)

A California appellate court deviated from the standard rule about security deposits in its recent holding in Gould v. Corinthian Colleges, Inc., (2011) 192 CA4th 1176. In Gould, the court held that a landlord waived his right to reserve the whole security deposit to cover actual damages to the property when the landlord accepted partial payment of a fee from the tenant and the tenant directed the landlord to take the remainder out of the security deposit.

Pursuant to the lease agreement, the tenant had opted to pay an early termination fee and vacate his lease early. He told the landlord that he was vacating and offered a small portion of the total termination fee. He told the landlord to subtract the rest of the fee out of his security deposit. The landlord accepted the partial payment and then realized that the security deposit might not be large enough to cover both the remainder of the early termination fee and all necessary repairs to the unit. The landlord claimed that the lease and the law disallowed the tenant to apply his own security deposit toward his rent and fees. The landlord reasoned that since the tenant failed to pay his whole termination fee properly, the lease was not terminated and the tenant still owed rent.

The court disagreed and held that by taking the partial payment, the landlord agreed to waive his right to reserve the whole security deposit to apply to other damages and agreed to use part of the security deposit as payment. The court also ruled that the lease was properly terminated and the landlord could not hold the tenant to back rent.

The Result

As a result of this ruling, landlords must now be advised to be very careful when accepting partial payments. When taking less payment than what is required by the lease agreement, the landlord should clarify whether or not the remainder is owed, forgiven, or to be debited from the security deposit. Landlords should also be advised that if they allow tenants to debit from the security deposit, that might decrease the amount of security that landlords have for their property.