Legislation Aimed at Expanding Use of Security Deposits by Commercial Landlords- Passed Assembly and Under Consideration by State Senate

The legislation seeking 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 from the termination of a lease after a tenant’s default is making its way toward becoming law.  Specifically, in response to a recent California case entitled 250 L.L.C. v. PhotoPoint Corp., 131 Cal. App. 4^th 703 (2005), Assembly Member Leland Yee (D-San Francisco) and Assembly Member Rick Keene (R-Chico) co-authored legislation – AB 1161 – aimed to rectify a ruling that presented a serious threat to the right of a commercial landlord to retain its security deposit post-default.  The holding of PhotoPoint placed the mandate of section 1950.7 of the Civil Code¹ – that a landlord return the unused portion of a security deposit within two weeks to 30 days of retaking possession – in front of most other rules and defenses it may have, even where the landlord’s damages exceed the amount of the security deposit. 

On the Assembly Floor on May 9, 2005, the Assembly voted unanimously (75 ayes, 0 noes, with 4 absents or abstentions) to pass AB 1161.  On June 13, 2006, hearings on the bill began in the Senate Judiciary Committee.  The bill is strongly supported by a number of commercial real estate organizations, including the California chapters of NAIOP (National Association of Industrial and Office Properties) and BOMA (Building Owners and Managers Association).