In my earlier posting, Commercial Landlord's Obligation to Return Security Deposits addressed the restrictive nature of California Civil Code Section 1950.7, which, generally limits the landlord's ability to use a commercial tenant's security deposit to up to approximately 2 months rent, when the default is the payment of rent. If you are holding more in the hope of using the balance to pay future rents, forget it, unless, your lease explicitly has the tenant waive the provisions of California Civil Code Section 1950.7, a provision that I don't see in leases often. Yes children, your first line of defense here, if you are a commercial landlord is to have a provision in the lease, explicitly waiving the landlord's restrictions. It should be noted that the "Standard," American Industrial Real Estate Association lease does not include such a waiver.
Let's go over a practical example, with and without an explicit waiver:
With Waiver: Landlord is not sure about the tenant's financial ability to pay rent so it requires as part of the lease, a security deposit equal to 6 months rent and CAM charges, which the tenant pays. 13 months into the lease, the tenant stops paying rent and is 2 months in arrears by the time they abandon the premises and terminate the lease. Assume for the moment that the lease has been terminated, an issue that I will discuss later in more detail. Landlord may immediately sue for future rents, assuming the lease already allows the landlord to do so and can apply all of the security deposit to the balance of rents owing, both in arrears and prospectively.
Without Waiver: Considering the above facts and if the lease does not provide a waiver of California Civil Code Section 1950.7, the landlord must return 4 of the six months security deposit withing 30 days after the termination of the lease, even though, both the landlord and tenant know that the landlord will ultimately be owed an amount equal to or greater than the 4 months security deposit that has to be returned.
In a strong economy, this issue may not arise that often since the leased premises are often re-leased relatively quickly and a large security deposit usually does not need to be drawn down upon and large security deposits are not as common. In a weakened economy it becomes a more significant issue since larger security deposits are more common and the need to draw upon the security deposits increases as vacancy rates increase.
There are some alternative remedies, some of which I favor and some, which I do not, all of which will be addressed in later posts. However, from the landlord's perspective the waiver of California Civil Code Section 1950.7, is clearly the least expensive and most favorable security deposit remedy that the landlord has in its arsenal against defaulting tenants.
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