Daily Development for
Monday, February 9, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD/TENANT; RESIDENTIAL; SECURITY DEPOSITS: Collection of pre-rental non-refundable cleaning fee is an evasion of security deposit statute and constitutes tortious unfair business practice.

Kraus v. Trinity Mgmnt. Services, 67 Cal. Rptr. 2d 210 (Cal. App. 1997) petition appeal granted 68 Cal.Rptr.2d 475 (Cal. 1998).

In this case, a landlord and management company in the San Francisco area were on the receiving end of a $1.5 million class action judgment for unfair business practices regarding their policies concerning tenant security deposits. Ironically, one of the practices had been approved in an appellate decision involving the same landlord in 1983, but a 1988 decision involving other parties, following an amendment of the security deposit statute, went against the landlord's position. The California Supreme Court has granted an appeal, but there is no decision as yet from that court. The result will be interesting.

The most controversial part of the opinion is the court's attack on the landlord's practice of requiring a one time, non-refundable $100 payment denominated the "Tenant Initiation Expense Reimbursement." The court read the statute as specifically prohibiting the collection of fees for purposes other than those specifically authorized. It affirmed (without comment) the trial court's conclusion that the fee was "not rent."

The court does not give us the statutory language. The relevant statute is Cal. C.V. Code 1950.5. The current (and presumably applicable) version of the statute defines "security" in subsection b as "any payment , fee, deposit or charge, including by not limited to, an advance payment of rent, used or to be used for any purpose, including, but not limited to, any of the following: [compensation for default in payment of rent, damages to the apartment, cleaning at termination of tenancy and other breaches of the rental agreement.]"

Subsection e of the statute, to which the court specifically alludes, contains a prohibition on the collection of security deposits other than for those purposes outlined under subsection b.

"The landlord may claim of the security only those amounts as are reasonably necessary for the purposes specified in subdivision (b). The landlord may not assert a claim against the tenant or the security for damages to the premises or any defective conditions that preexisted the tenancy, for ordinary wear and tear or the effects thereof, whether the wear and tear preexisted the tenancy or occurred during the tenancy, or for the cumulative effects of the ordinary wear and tear occurring during any one or more tenancies."

The court cites at several points the 1988 decision, Smith v. Parkmerced Co., 244 Cal. Rptr. 22 (Cal. App. 1988). The Smith case really casts little light on the fundamental interpretation here, but the concurrence in that case is instructive:

[This statute "teeters] on the brink of unintelligibility." The only reason it still teeters is because of judicial efforts to keep it alive, and these efforts have been considerable."

Fundamentally, the Smith decision and this case hold that a landlord can extract from the tenant no payment other than rent except for the four purposes identified as permitted under subdivision (1)(b) above. In another precedent case, Granberry v. Islay Investments, 207 Cal.Rptr. 652 ( Cal App 1984), a court refused to conclude as a matter of law that a requirement that the tenant pay a higher rent in the first month than in subsequent months meant that the extra amount necessarily was not "rent" and remanded for a determination on that issue.

The statute does say, at another point (subsection (1)(l), that "no lease . . . shall contain any term characterizing any security as 'nonrefundable.'" But, of course, this language begs the question of just what exactly is a security deposit.

Comment: It's sometimes nice when courts can "cut through the red tape" and identify and implement a clear statutory purpose notwithstanding weak legislative language. But there comes a point when the legislature must be held to a standard of intelligibility. The reading that Smith and this case place upon the statute is very strained, and there is every reason to understand that a landlord would be unable to understand it. Smith did provide some interpretive authority for the landlord in this case, of course, but Smith arose in a rent controlled area, where distinctions between what constituted "rent" and what constituted prohibited "fees" was quite relevant. The court in the instant case says nothing about rent control being a factor. If the tenant must pay a uniform extra amount as part of the first month's charges, how can it be anything other than "rent?" It clearly is not a fee for anything the tenant has done to the premises. It also is not related to any specific issues related to the prior condition of the premises, as it is a uniform fee regardless of the size or condition of the premises. It is, in short, a charge for occupancy, not a charge for cleaning, and definitely not a "deposit."

LANDLORD/TENANT; RESIDENTIAL; SECURITY DEPOSITS: Landlord's "liquidated damages" charge for tenant's termination of lease violates security deposit statute and constitutes unlawful business practice.

Kraus v. Trinity Mgmnt. Services, 67 Cal. Rptr. 2d 210 (Cal. App. 1997) petition appeal granted 68 Cal.Rptr.2d 475 (Cal. 1998).

This case also is reported in another item under the same heading. In that case, the editor was very critical of the court's characterization of a uniform non-refundable advance fee as a "security deposit." The fee involved in this aspect of the case, however, was forfeitable if the tenant the permission of the tenant to terminate prior to the end of the term, and otherwise might be returned to the tenant. Further, the tenant remained liable, in addition to this forfeiture, for rent through to the end of the term if landlord was unable to rent. It is difficult to see how such a fee could be anything other than a security deposit. The court spent virtually no time on this aspect of the problem, and instead analyzed whether it was possible to support the charge as a reasonable attempt to liquidate the landlord's damages relating to this type of tenant nonperformance. It had little trouble shooting down the landlord's arguments here as well.

Comment: What is interesting and worthy of comment here is that this type of provision, despite it's obvious inconsistency with restrictions on security deposits, is in common use throughout the country. The decision here is an interesting precedent for class actions in other jurisdictions under an unlawful trade practices statute. The big difference (in addition to the class action aspect) is the attorney's fee awards that commonly appear in these statutes, but do not necessarily appear in security deposit statutes. Here the attorneys received a fee award of $250,000.

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