Rent
Control Board to Review Security
Deposit Interest Law |
By Anita Varghese
Staff Writer
September 27 -- The Rent
Control Board on Thursday is set to
review a longstanding policy that
allows landlords to keep the interest
accrued on a tenant’s security
deposit.
The current law requires landlords to hold security
deposits in an interest bearing account at a federally
insured financial institution until they are returned
to the tenant or used by a landlord as authorized.
Although provisions governing interest on security
deposits are in a 1999 amendment to the rent control
law, there are no regulations currently in place
to implement the provisions.
After a few tenants looked into the issue, staff
provided a summary of how other rent control jurisdictions
handle security deposit interest payments for
the board’s review. However, no action will
be taken Thursday night, nor is there any proposed
regulation for the board to approve.
“Given our past experience, staff has reservations
about recommending an interest on security deposits
program,” said Michaelyn Jones, the board’s
general counsel.
“However, should the board choose to adopt
such a regulation in the future, staff recommends
that actual interest earned on security deposits
be paid to the tenant, less the landlords administrative
costs of paying out the interest earned.”
Staff also recommends that tenants have a small
claims court remedy if landlords refuse to pay
the actual interest earned on security deposits.
In Action Apartments Association vs. Santa Monica
Rent Control Board, the California Second Court
of Appeal issued a lengthy 2001 opinion in which
numerous flaws were identified in the board’s
previous regulation requiring landlords to pay
a three-percent interest on security deposits
annually to tenants.
The local landlords association argued and the
Court agreed that landlords were not annually
earning three-percent interest on security deposits.
Landlords should not be required to absorb out-of-pocket
expenses mandated by an annual regulation for
all landlords, the Court said.
The case was settled in 2003 when the Rent Control
Board agreed to pay $188,216 in damages and attorney’s
fees.
“I’m not getting much money on interest
from my tenants’ security deposits,”
said landlord Mathew Millen. “And the Fed
just lowered interest rates again. Also, no landlord
or tenant is going to collect a lot of money from
interest if the security deposit is kept in a
short-term account.”
State law requires landlords to return security
deposits within three weeks of tenants vacating
their units, which makes keeping deposits in long-term
bank accounts unfeasible.
Long-term bank accounts yield higher interest
rates, but then landlords would be charged penalties
if a tenant moves out before the account reaches
its maturity.
“We have to leave security deposits in
accounts that don’t have penalties and we
have to give them back to tenants within three
weeks because this is state law,” Millen
said. “This means the deposit can only reasonably
be kept in a short-term account.”
In light of prior litigation, Jones said any
regulation requiring landlords to pay interest
on security deposits should stipulate that the
amount not exceed the actual interest earned.
Landlords must also be allowed to keep part of
the interest to offset the costs of interest payment
administration such as time and salaries spent
on accounting and auditing.
Jones will discuss security deposit interest
payment laws in Los Angeles, West Hollywood, Berkeley
and San Francisco.
The Rent Control Board meets at 7 p.m. tonight
in the City Council Chamber, City
Hall, 1685 Main Street.
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