Field Notes: Smile When You Pay Their Attorney

An old broker friend calls me now and then. He helps his adult children manage a family trust that holds a number of rental properties, and when something goes sideways, my phone rings.

This time it was a long-term rental, a standard one-year lease. A tenant signed, paid the first month's rent plus a security deposit of two months' rent, and was set to move in. A week before possession, she called to cancel for health reasons.

Up to that point, the owners did everything right. A tenant who walks away before moving in doesn't simply walk away from the lease. The owner can recover lost rent, but only after making a real effort to re-rent the property. They did. They advertised, showed the unit, and filled it for most of the lease term. Their claim to keep part of the money was solid.

Then the attorney letter arrived.

The Problem Wasn't the Rent. It Was the Deposit.

Since July 1, 2024, California caps residential security deposits at one month's rent, furnished or unfurnished. A narrow exception allows two months, but only for a small landlord: an individual (which can include someone who holds property through a family trust) or a limited liability company (LLC) owned entirely by individuals, with no more than two rental properties and no more than four units in total. A family trust holding a portfolio of homes fails that test on the property count alone.

Collecting two months was a violation on day one, before the tenant cancelled and before anyone lost a dollar. It changed the whole case. The owners had been the injured party. Now they were a landlord who had broken the security deposit statute, facing a judge.

My Advice: Pay It, and Smile

Refund the excess deposit. Settle the rent question on the tenant's terms. Pay the tenant's attorney's fee, and be thankful the bill is only one attorney's fee.

Here's the alternative. If this goes to court:

• Two sets of attorney's fees. You pay your own lawyer. If the lease has an attorney-fee clause, it works in both directions, so you may pay theirs too.
• A statutory penalty. A landlord who retains a deposit in bad faith can owe up to twice the deposit as a penalty, on top of the deposit itself. Twice a two-month deposit is four months' rent.
• Court costs and interest.
• The room you're walking into. In my experience, California courts start from sympathy for the tenant. A landlord who is plainly out of compliance with the deposit law shouldn't expect the judge to credit his careful re-renting effort.

A strong case on the rent does not rescue a weak case on the deposit. The violation is simple, documented, and on the tenant's side. Everything else becomes secondary.

The Lesson for Owners

Your lease forms are only as current as the last time someone checked them against the law. Many family portfolios still run on paperwork from before 2024, and some owners assume the old two-month rule still applies, or that holding property in a family trust earns them an exception. The exception turns on how much you own, not how you hold it.

If you own more than two rental properties, more than four rental units in total, or hold property in an LLC with a corporate member, your deposit maximum is one month's rent. Check your forms before your next lease signing, not after the attorney letter.

And if that letter has already arrived, do the arithmetic before you get angry. Sometimes the smartest check you'll ever write is the one that ends it.