Holding Deposits: What California Tenants Should Know

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Right alongside a newfound sense of freedom and a beautiful Pinterest idea board for new decorating ideas, getting that security deposit back is one of the sweetest parts of moving out of a rental unit. Like a security deposit, holding deposits happen right at the beginning of the move-in process, if they happen at all, but that's just about where the similarities between the two types of deposits begin and end.

Holding deposits come in handy if tenants need time to gather the funds for required move-in payments or want to hold on to prospective rental units while still browsing their options. But unlike security deposits, these optional payments can get legally murky for California renters.

What Is a Holding Deposit?

Confusion often arises around how holding deposits compare to security deposits, making it extra important to understand the definition of security deposits and the difference between the two.

A security deposit is a refundable payment in California. The tenant deposits money to the landlord before moving in to serve as proof of intent to pay for and maintain the space. Typically, security deposits are paid upon signing a lease agreement, often with the first months' rent, and returned to the tenant upon moving out provided the property was left reasonably unharmed. This type of deposit helps landlords offset the cost of potential damages to the unit or unpaid rents, expenses which might be deducted from the returned deposit amount, hence the "security" part.

Security deposits vary widely in terms and amounts, but they are virtually always a part of the rental process; holding deposits are less common. A holding deposit agreement is made with a prospective tenant of a rental property, who pays it to the landlord in order to reserve the rental unit until the renter moves in.

Paid in addition to the security deposit and first month's rent, a holding deposit aims to ensure that the space is not rented to someone else before the tenant who paid the deposit is able to move in. Sometimes, the holding deposit payment is applied to the first month's rent or security deposit when the tenant signs the lease agreement and officially moves in.

Holding Deposit: Purpose and Legality

Ideally, the purpose of a holding deposit is to compensate the property owner for monetary losses in case the prospective tenant does not ultimately move into the rental unit. It's common for a holding deposit agreement to specify that, if the tenant does not move in, the property owner retains a part of the deposit equal to the actual monetary losses caused by the failure to occupy the unit incurred during the holding period.

"Holding deposit agreement" is the key phrase here. While California law does not prohibit holding deposits, it remains ambiguous on the mechanics of these agreements. Although the California Civil Code lays out details, such as the maximum amount of a security deposit and how long a landlord has to return that deposit once the tenant leaves, the Golden State does not provide these or similar legal guidelines for holding deposits.

Holding deposits are generally held to the legal standards set out in California Civil Code Section 1950.7, dealing with deposits and the rental of real estate. This legislation, dating back to 1872, features broad language such as "the landlord may claim of the payment or deposit only those amounts that are reasonably necessary," making it not too much help when it comes to holding deposits, specifically.

Because California holding deposit law isn't as explicit as most of the people paying a holding deposit would like it to be, it's even more crucial for the property owner and prospective tenant to enter into their own clear, legally binding written agreement when opting for a holding deposit arrangement.

A Strong Holding Deposit Agreement

Fortunately for tenants and landlords, organizations such as the California Apartment Association and San Diego County Apartment Association offer stock holding deposit agreement forms that are free to peruse, download and use.

As precedent-setting examples for what a strong holding deposit agreement might look like, these deposit agreement forms record key factors such as the names and contact information for the landlord and prospective tenant; the address of the rental property in question; the dates the holding period will span; and the exact dollar amount of the holding deposit.

Thorough holding deposit agreements such as these detail the conditions that must be fulfilled in order to rent the space to the prospective tenant, such as meeting a certain minimum credit score. Of course, taking time to obtain credit scores or check references is a typical reason to enter a holding deposit agreement in the first place.

Additionally, a solid agreement states what will happen to the deposit when the tenant does or does not move in. In the latter case, it's particularly important to note exactly how much of the deposit the property owner can retain, as well as setting a time frame in which the remainder of the money must be returned. Along with the holding deposit agreement, a written receipt stating that the holding deposit was applied to the security deposit or to the first month's rent serves as additional protection for tenants.

Potential Holding Deposit Complications

At Nolo.com, tenant law attorney and former public defender Janet Portman notes that the basic rule for holding deposits in California, as emphasized in Civil Code Section 1950.7, is that the property owner may only retain the amount of the deposit that covers "reasonable costs" while holding the unit in question for the prospective tenant.

Because reasonable costs can include everything from continued advertising to prorated rent, this can get sticky. It's not uncommon for California tenants to take landlords to small claims court over disagreements on how much of a holding deposit is owed to them. Section (e) of Civil Code 1950.7 comes in handy here, noting that a landlord's bad faith retention of a deposit may subject the landlord to a $200 fine, in addition to responsibility for actual financial damages.

California Civil Code Section 1940.6 does offer a clear prohibition, at least, though it's admittedly a very specific one. This legislation makes it illegal for landlords to enter a rental agreement, accept a credit check fee or negotiate "any writings that would indicate a tenancy" (which includes holding deposits) if the property owner has applied for a permit to demolish the unit.

Another thing that is uncomplicated in California, though, is that a nonrefundable holding deposit — just like a nonrefundable security deposit — is illegal. As the tenant lawyers at Tobener Ravenscroft of San Francisco put it, "In California, there is no such thing as a nonrefundable holding deposit."

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About the Author

As a freelance writer and small business owner with a decade of experience, Dan has contributed legal- and finance-oriented content to diverse sources including Chron, Fortune, Zacks.com, Motley Fool and MSN Money, among others.