Metropolitan News-Enterprise


Thursday, August 10, 2006


Page 1


Court of Appeal Says Landlords May Be Forced  to Pay Interest on Tenants’ Security Deposits




A since-amended San Francisco ordinance requiring landlords to pay 5 percent interest on security deposits held for more than one year did not cause not an unconstitutional taking of property, the First District Court of Appeal ruled yesterday.

Div. Five affirmed San Francisco Superior Court Judge Richard Kramer’s ruling in favor of the city in a class action brought on behalf of small landlords. The landlords argued that once money market interest rates dipped below 5 percent, they were “damaged by having to pay [the] difference from their own funds,” and that this violated the state and federal constitutional requirements that property not be taken for a public purpose without compensation.

 The ordinance was amended in 2002, several months after the suit was filed, to require that interest be paid at the Federal Reserve discount rate instead of a fixed rate.

Alameda Superior Court Judge Thomas Reardon, sitting on assignment in the Court of Appeal, said the trial judge was correct in ruling that the ordinance did not effect a taking.

Reardon reasoned that the ordinance did not create a regulatory taking because there was no “inexorable” loss to the landlords.

He explained:

“[L]andlords would not necessarily have to pay out more interest than they earned on the security deposits, because the Ordinance did not compel them to invest the deposits in accounts paying less than 5 percent interest. Indeed, as the trial court noted, landlords could invest the security deposit ‘in a higher risk venture, use it as working capital for the rental business, or use it for general personal or business cash flow purposes,’ constrained only by the obligation that, within a statutory period after the termination of the tenancy, the landlord had to pay the tenant an amount equal to the security deposit and interest, less permissible deductions.”

The jurist cited evidence that the overall average yield for money market funds was 5.14 percent for the period from January 1985 through July 2002, the month before the ordinance was amended. Even if there were transactional fees, Reardon added, there was no evidence that landlords experienced a net loss from the holding of their deposits.

While some landlords did, in fact, have to pay out more to the tenants than the interest they gained on the deposits, the net losses were small and were offset by the benefit to the landlords of being allowed to hold the security deposit, which could be returned without interest after a year or less if the landlord chose, the jurist said.

The case is Small Property Owners of San Francisco v. City and County of San Francisco, A108924.


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