Security Deposits

Unlike residential security deposits, commercial deposits held to secure a rental agreement can be negotiated between the parties. The laws governing residential property and the handling of security deposits are long and tedious. Commercial tenancies however are much more negotiable in that the parties may mutually agree on any amount to be designated as security.

Security Deposit:

California Civil Code Section 1950.7 establishes that a commercial landlord may use a security deposit to remedy monetary defaults, to repair damages to the premises caused by a tenant, and to clean the premises following termination of a lease.

The deposit is required to be held by the landlord for the tenant, but need not accrue interest. The landlord may claim an amount of the deposit only for those amounts that are reasonably necessary to remedy tenant defaults in the payment of rent, to repair damages to the premises caused by the tenant, or to clean the premises upon termination of the tenancy, if the payment or deposit is made for any or all of those specific purposes.

Upon termination of the landlord’s interest in the unit in question, whether by sale, assignment, death, appointment of receiver, or otherwise, the deposit shall within a reasonable time be: 1) transferred to the landlord’s successor in interest; or 2) return the portion of the deposit remaining to the tenant after any lawful deductions.


As a good business practice, the deposit should be maintained in a federally insured bank account and either not commingled, or reconciled for monthly. Deposits may be drawn upon during the term of the agreement, and any unused portion must be returned to the tenant at a time mutually agreed upon, but no later than 30 days from the date the landlord receives possession.

Although commercial tenancies do not require an accounting upon the return of the deposit, as with residential tenancies, unless otherwise provided for in the rental agreement

The deposit itself may be claimed by the landlord during and/or after the tenancy for damaged caused but remained uncured, or for outstanding rental amounts. Should the landlord draw from the deposit during the tenancy, there will usually be a clause in the agreement which sets forth a specific period of time in which that amount must be replenished by the tenant.

Nonpayment of Rent:

At the end of a commercial tenancy, where the landlord’s only claim against the security deposit is a for a default in a rental payment, the deadline to refund the balance may be reduced from the 30 days referenced above. This turns the time on whether or not the deposit covers more or less than one month’s rent.

The California Civil Code provides that if a security deposit in a commercial lease exceeds the first and last month’s rent and is used to cover only defaults in the payment of rent, the portion of the deposit in excess of the amount equal to one month’s rent shall be returned to the tenant within two weeks after the landlord receives possession of the premises, with the remainder to be returned or accounted for within thirty days after the landlord receives possession of the premises.

As such, when a security deposit in a commercial tenancy is greater than that of one month’s rent and any amount designated as the last month’s rent, the agreement should set forth that the time limitations of Civil Code §1950.7 are waived by the tenant. In doing so, the language should clearly state that the security deposit can be held and applied against future damages. Otherwise, should the tenant vacate the premises prior to the expiration of the agreement and the landlord not elect to terminate the agreement, the landlord must return the amount of deposit which exceeds one month’s rent unless otherwise waived.


California strictly prohibits commercial landlords from requiring or demanding “key money”, or funds otherwise used to induce the landlord into renting the property to the tenant, including the payment of the landlord’s attorney’s fees necessary to prepare the agreement. A violation of this restriction by the landlord could result in monetary damages including attorney’s fees, and a penalty of three times the amount of actual damages approximately suffered by the person seeking to obtain the rental.

However, this restriction does prohibit the advanced payment of rent if stated as such in the rental agreement or for the landlord to charge a reasonable amount for the purpose of conducting reasonable business activity in connection with initiating, continuing, or renewing a lease or rental agreement, including, but not limited to, verifying creditworthiness or qualifications of any person seeking to initiate, continue, or renew a rental agreement.


The damages for bad faith retention of a commercial property tenant’s security deposit is subject to statutory damages in addition to the tenant’s “actual damages,” which are recoverable in court.

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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.

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