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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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"Staff recommends that actual interest earned on security deposits be paid to the tenant." Michaelyn Jones


“I’m not getting much money on interest from my tenants’ security deposits.” Mathew Millen.



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