Santa Monica, California: security deposit interest

City Charter § 1803(s) says the money "shall be placed in an interest bearing account at a federally insured financial institution," and then adds: "Unless and until the Board enacts regulations directing that the interest on such accounts be paid directly to the tenant, the landlord may either pay such interest directly to the tenant or use it to offset operating expenses." That second sentence is an express allocation of the interest to the landlord's choice, which is why the answer here rests on the charter's words rather than on silence. The Rent Control Board once used its power to change that — a 1999 regulation set three percent — but the Board suspended it effective June 22, 2002 and has never revived it. The Board's own current information sheet puts the position in one line: its regulations do not require an owner to pay a tenant interest on a security deposit.

Santa Monica deposit interest at a glance

Who and what is covered

The requirement lives in the city's rent control law — City Charter article XVIII, § 1803(s), and Rent Control Regulation 14001(a) — and by its terms covers "any payment or deposit of money the primary function of which is to secure the performance of a rental agreement or any part of such agreement, including an advance payment of rent."

Custody of the deposit

Mandatory, and unusual for California. Charter § 1803(s) requires the deposit to be "placed in an interest bearing account at a federally insured financial institution until such time as it is returned to the tenant or entitled to be used by the landlord," and Regulation 14001(a) repeats the duty, naming institutions insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation. California's own deposit statute imposes no account requirement at all, so this is a genuine local addition. Neither the charter section nor the regulation chapter states a penalty for failing to place a deposit that way.

How this interacts with state law

California's Civil Code § 1950.5 requires no interest and no particular kind of account, and no state law stops a city from requiring either. Santa Monica requires the account but not the payment. The charter allocates the earned interest to the landlord's choice — pay it to the tenant, or use it to offset operating expenses, in which case the offset counts as a factor in individual rent adjustments — and it does so "[u]nless and until the Board enacts regulations directing that the interest on such accounts be paid directly to the tenant." The Rent Control Board holds that power and has not exercised it since 2002.

Notes and caveats

• The three percent figure, and the date it stops — Regulation 14001(b) through (f), adopted January 28, 1999 and effective February 12, 1999, required three percent simple interest a year on security deposits held at least a year, accruing from January 1, 1999, payable directly or as a rent credit. The landlords' association sued in March 2000. On December 13, 2001 the Court of Appeal decided Action Apartment Assn. v. Santa Monica Rent Control Bd. (2001) 94 Cal.App.4th 587, holding that the complaint sufficiently pleaded a takings claim and reversing the dismissal. The Board then suspended subsections (b) through (f) itself on June 13, 2002, effective June 22, 2002, and settled the case in July 2003. The chapter's own adoption history runs on to August 2024 with no re-adoption. Any claim that Santa Monica requires three percent interest is quoting a regulation that stopped operating on June 22, 2002.
• What the court actually decided — The precision matters, because the case is often described as striking the regulation down. It did not. The Court of Appeal reversed an order sustaining a demurrer — it held the landlords' complaint stated a takings claim and sent the case back to the trial court, concluding that the Board "has not offered a legitimate reason for making landlords pay 3 percent interest on security deposits." No judgment invalidating the regulation was entered. The regulation's actual end came from the Board, which suspended it eleven weeks after review was denied. The accurate way to put it is that the three percent requirement did not survive the litigation.
• Why the claim keeps circulating — Two mechanisms feed it. The first is a sentence from the 2001 opinion's own background — "Since January 1, 1999, the city has required landlords to pay tenants 3 percent interest per year on security deposits" — which was true when written and appears verbatim on every host of the opinion; writers lift it without the disposition or the 2002 suspension. The second is compression of the real rule: an interest-bearing account is required, and "interest-bearing account required" shortens badly into "interest required." A property-management site now states that "Santa Monica also requires interest payments, with enforcement overseen by its Rent Control Board," a sentence built by appending Santa Monica to a true statement about Los Angeles. A landlord association had to print a correction on this exact point in 2018.
• The Board looked at it again in 2007 and declined — On September 27, 2007 the Board took up a General Counsel memorandum headed "Interest on Security Deposits." The memorandum stated: "Currently we do not have a regulation that directs the interest be paid to the tenant. We did, however, have one in the past." It recorded the settlement cost of the earlier litigation — $182,500 in attorneys' fees and $5,716 in costs — advised that any new regulation could not exceed the interest actually earned and would have to let the landlord keep part of it for administration, and recommended against an across-the-board percentage. Staff had reservations about recommending such a programme at all. The Board, in its own words, elected to continue its current position of not requiring interest to be paid. It adopted nothing, which is why the adoption history shows no 2007 entry.
• One city page is out of date on deposit caps — The Board's legacy security-deposits page is still live and is the best source for the 2007 record, but its deposit-cap text is superseded: it still says a deposit cannot exceed two months' rent unfurnished or three months' furnished. Since July 1, 2024 the cap is one month's rent, except that a landlord who is a natural person, or a limited liability company all of whose members are natural persons, owning no more than two residential rental properties totalling four or fewer units may ask two months' rent unless the prospective tenant is a service member. The current regulation chapter and the Board's August 2024 information sheet carry the correct figures.

Cite this page: "Landlord Atlas, Santa Monica, California: security deposit interest (verified August 28, 2026), landlordatlas.com/laws/deposit-interest/california/santa-monica/" — free to cite and quote with a link (how these records are verified).

Citations

• Santa Monica City Charter art. XVIII (Rent Control), § 1803(s) (verified 2026) Official source
• Santa Monica Rent Control Regulations ch. 14 (Security Deposits), reg. 14001(a), eff. Aug. 17, 2024 · reg. 14001(a) (verified 2026) Official source
• Santa Monica Rent Control Board, Security Deposits information sheet (August 2024) (verified 2026) Official source
• Santa Monica Rent Control Board, Regulations Adoption History (Chapter 14 entries) (verified 2026) Official source
• Santa Monica Rent Control Board, staff report: Interest on Security Deposits (Sept. 27, 2007) (verified 2026) Official source

How this record was verified: Santa Monica City Charter article XVIII, § 1803(s) read in full in the city's compiled Rent Control Charter Amendment and cross-read against the city's electronic code; the Rent Control Board's current Regulation Chapter 14, effective August 17, 2024, read in full including its adoption-and-suspension history block; the Board's complete Regulations Adoption History for Chapter 14, dated June 19, 2026, read in full; the Board's August 2024 Security Deposits information sheet read; the Board's September 27, 2007 General Counsel memorandum and the Court of Appeal opinion attached to it read page by page from the scanned original on the city's site; and every occurrence of the word 'interest' within 250 characters of the word 'deposit' across the 339-page charter-and-regulations compilation enumerated in context.

This page records local law on deposit interest. The statewide position — California's security-deposit statute says nothing about interest — no part of Civil Code § 1950.5 requires a landlord to pay or credit a tenant any interest on a residential deposit. — lives on the California deposit-interest page with its own citations and verification date.