(Written by Jonathan Kim)

In an ideal world, an eviction against bad tenants should be pretty straightforward, but in the city of Los Angeles, the devil is always in the details. Properties under the Rent Stabilization Ordinance (“RSO”) are held to a higher standard of laws and regulations, with many requirements being buried in between the lines of some multi-page disclosure or notice. Landlords who manage RSO properties must ensure that they are adhering to the laws set forth by the ordinance; otherwise, tenants will find a way to slam affirmative defenses against an eviction lawsuit. One particular defense that is starting to be more prominent in Court is whether or not the landlord paid interest on the tenant’s security deposit. As a result, even a technically valid eviction may fail if a Landlord has not complied with the RSO’s security deposit interest requirements, which is turning into a growing issue that Landlords cannot afford to overlook.

According to the Los Angeles Municipal Code Section 151.06.02, Landlords who are subject to the Rent Stabilization Ordinance shall pay annually interest on all security deposits held for at least one year for their tenants. Landlords have one of two options to determine the annual rate of interest:

1. Use the annual rate of interest established by the Rent Adjustment Commission. This rate shall be based on the average of the interest rates on saving accounts paid on September 1 of the previous year by at least five Federal Deposit Insurance Corporation.

OR

2. Use the actual interest earned on each security deposit account each year. Landlords that choose this option must provide the tenant with bank statements indicating the amount of interest earned on the security deposit for that year. In the event the landlord fails to provide that information to the tenant at the time it transmits payment of the interest to the tenant, the interest rate required to be paid, shall be the rate set by Rent Adjustment Commission.

The Los Angeles Housing Department posts the amount of interest to be paid on an annual basis.

Landlords have the choice to pay out the security deposit interest on a yearly or monthly basis. Payments may be made either directly to the tenant or in the form of rental credit. Landlords must notify the tenant in writing of their choice of how payments shall be made. Upon termination of the tenancy, payments of any unpaid accumulated interest on the tenant’s security deposit must be made at the same time and in the manner required for return of security deposits. Landlords should practice proper accounting of the security deposit interest on the ledger.

Failing to meet these straightforward requirements will result in complications with an eviction lawsuit. In Court, the game for the tenant is to find any way where the Landlord has violated ANY requirement for compliance and are looking for any technical violation that can be raised as an affirmative defense. Failing to pay security deposit interest, regardless of how little the amount, can be argued against the Landlord and may bar recovery in the eviction lawsuit.

Following procedure is critical, but certain procedures, like paying interest on a tenant’s security deposit, can often be overlooked. In a city that demands strict compliance, landlords should not underestimate the impact that even small oversights can have on their ability to successfully pursue an eviction. To avoid these pitfalls, landlords should take a proactive approach in reviewing their policies and ensuring full compliance with all applicable regulations. Contact Kendall Law today to schedule a consultation and ensure that you are fully compliant and protected.