Updated on July 6, 2022
In the commercial landlord-tenant market, landlords are always at risk that their commercial tenants will prematurely abandon the lease. When this happens, without the applicable waiver, commercial landlords cannot offset a tenant’s security deposit against the anticipated loss in rent. In this blog, we discuss the California case responsible for the foregoing rule.
Before discussing the case, the following relevant text from California Civil Code Section 1950.7 (c) (1) & (2), offers some guidance.
California Civil Code Section 1950.7 clearly requires landlords to return any excess deposit amount to the tenant no later than thirty (30) days from receiving possession of the property. In 250 L.L.C. v. Photopoint Corp., the landlord put this provision to the test. (See 250 L.L.C. v. Photopoint Corp.(2005) 131 Cal. App. 4th 703.)
To better understand 250 LLC v. Photopoint Corp.,we first provide a brief summary of our prior related blog. In our Commercial Tenancies and Mitigation blog, we mentioned that commercial landlords with prematurely abandoned leases have two available remedies to choose from. Landlords can either deem the lease terminated and seek the applicable California Civil Code Section 1951.2 damages. Or, with the required language in place, they can continue the lease and seek rent as it becomes due. (See Cal. Civ. Code Section 1951.4.)
In 250 L.L.C. v. Photopoint Corp., the landlord terminated the lease and sought California Civil Code Section 1951.2 damages. Because several years remained on the lease, the landlord decided to offset the tenant’s security deposit against its anticipated rent damages. Given that there were several years of unpaid rent, the landlord’s damages far exceeded the deposit and the landlord retained the security deposit.
The tenant’s successor sued the landlord for its failure to return the deposit. The lower court ruled in the landlord’s favor. The appellate court reversed. The appellate ruled that California Civil Code Section 1950.7 unambiguously required the landlord to return the excess deposit within the prescribed time. Specifically, the court stated that the code required the landlord to calculate its damages up through the prescribed time and return any “excess” amount back to the tenant. In its ruling, the court also established the following waiver rule. That is, the court held that the landlord’s action would have been proper had the lease contained an express California Civil Code Section 1950.7 waiver.
To put it all together, a commercial landlord can only keep the security deposit if (a) the lease explicitly waives the Cal. Civ. Code § 1950.7 protection, and (b) the anticipated future damages exceeds the security deposit.
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