Overview of AB 12: New Security Deposit Limitations for Landlords

As of July 1, 2024, Assembly Bill 12 (AB 12) introduces a significant change to California’s landlord-tenant landscape: residential landlords can now generally only request a security deposit equivalent to one month’s rent from tenants. Previously, landlords could charge up to two months’ rent as a deposit, or three months for furnished properties. This change, affecting leases statewide, amends California Civil Code Section 1950.5. Exceptions apply for certain smaller landlords, but overall, the one-month cap aims to make renting more affordable and accessible.

This shift underscores California’s broader trend of strengthening tenant protections in response to the state’s ongoing housing crisis. Understanding the new law’s implications is critical for landlords as they navigate its immediate and long-term effects on their leasing practices.

Impact on Landlords: Financial and Operational Considerations

• Reduced Upfront Revenue for Landlords Security deposits help landlords offset the risks associated with property damage or unpaid rent. Under the new law, the lower deposit limit reduces the financial cushion landlords previously relied upon. This could particularly affect smaller landlords who rely on deposits to address unforeseen property damages or manage tenant-related financial losses.
• Increased Emphasis on Tenant Screening With less upfront security, landlords may turn to more rigorous screening processes to mitigate financial risks. Enhanced background and credit checks, thorough employment verification, and stronger references may become more commonplace as landlords prioritize finding tenants who are likely to uphold lease agreements and minimize property damage.
• Potential Shifts in Rental Pricing and Lease Terms To compensate for reduced security deposits, some landlords might adjust monthly rental rates or adopt alternate lease terms. This could include structuring leases with more stringent damage or repair clauses. Landlords may also consider increasing rent to offset potential repair costs that might previously have been covered by higher deposits.
• Possible Rise in Insurance Uptake To protect themselves against property damage risks, landlords may increasingly turn to rental insurance or policies that cover tenant-related damages. Although this adds an extra layer of expense, it can serve as a safeguard in the new, lower-deposit environment.

Benefits and Potential Challenges for Tenants

• Improved Accessibility and Affordability For tenants, particularly in California’s competitive housing market, the law offers an immediate benefit: lower upfront costs. By reducing security deposits, AB 12 can make housing more accessible for renters who previously found it challenging to meet high initial expenses, especially in high-rent areas.

• Enhanced Opportunity for Broader Demographics Lower security deposits mean that renters from varied financial backgrounds—especially those without large cash reserves—can secure housing without the barrier of high deposit demands. This is particularly valuable for young renters, lower-income tenants, or those entering the rental market for the first time.

• Stricter Screening and Reduced Flexibility Tenants may find landlords less flexible regarding negotiation on rental terms or damages. With less financial protection in the form of deposits, landlords may be more diligent about enforcing lease clauses or may approach any breaches with a stricter stance, impacting tenant flexibility.

Considerations for Landlords Navigating the New Law Landlords can adapt to these changes by revisiting their rental agreements and adjusting lease structures to better protect their interests within the confines of the new law. Working closely with legal counsel to review lease agreements and developing a strong tenant screening strategy can also mitigate risks.

As tenant protection laws in California continue to evolve, it is essential for landlords to stay updated on regulatory changes and seek expert guidance on compliance. For more information or assistance, reach out to TLD Law. We provide comprehensive legal support, including landlord-tenant advisory services and real estate litigation.

About the Author Roy Jimenez, a Partner at TLD Law since 2006, has over 25 years of experience in business and real estate litigation. He handles a wide range of real estate matters, including landlord-tenant disputes, breach of contract, and commercial lease issues. Mr. Jimenez’s extensive experience allows him to help clients navigate complex legal landscapes while achieving favorable outcomes. He is rated “AV Preeminent” by Martindale Hubbell, a designation awarded to only the top 10% of attorneys.

For further guidance on how AB 12 affects your leasing and rental practices, or for support in other real estate matters, contact Roy J. Jimenez at rjimenez@tldlaw.com or call 1.877.923.0971.