Commercial Security Deposit Bill (AB 1161) Dies In Senate
Judiciary Committee

Legislation governing the disposition of security deposits in commercial leases and backed by the California commercial real estate industry recently failed to pass in the Senate Judiciary Committee by a 2-3 vote. Voting in favor of AB 1161 were Senators Bill Morrow (R-Oceanside) and Tom Harman (R-Huntington Beach). Voting in opposition of the bill were Senators Joe Dunn (D-Santa Ana), Sheila Kuehl (D-Santa Monica), and Martha Escutia (D-Whittier).

AB 1161 was drafted to, in effect, neutralize the ruling in a recent California decision entitled 250 L.L.C. v. PhotoPoint Corp. (2005) 131 Cal. App. 4th 703 that presented a serious threat to the right of a commercial landlord to retain its security deposit post-default. The legislation sought to restore the long-standing and common practice of allowing a commercial real estate landlord to apply its bargained for security deposit to the actual damages a landlord suffers in the wake of the termination of a lease after a tenant default.

While the reasoning behind the votes against this bill is not clear, opponents of the bill expressed concern that the bill would have been the first step toward imposing similar burdens on residential tenants. In the words of the Western Center on Law & Poverty, "permitting a residential landlord to retain a tenant's security deposit pending the resolution of a dispute regarding future rent could grossly undermine a residential tenant's ability to seek fair treatment under the law and could give landlords an additional monetary 'hammer' to use in a situation where the power is often already balanced in favor of the landlord." The authors of AB 1161, Assemblyman Leland Yee and Assemblyman Rick Keene, will likely continue to promote similar legislation during the next legislative session.

This Real Estate Update was prepared by Phillip Wang of the firm's San Francisco office. If you have any questions regarding any real estate legal matter, in San Diego please contact Brian Frasch (litigation) at bfrasch@gordonrees.com or Eric Young (transactions) at eyoung@gordonrees.com or call us at (619) 696-6700. In San Francisco, please contact Phillip Wang (litigation) at pwang@gordonrees.com.