Are Security Deposit Waiver Products Legal for South Bay Landlords in 2026?

Published July 15, 2026

Yes, deposit-waiver and surety-bond products are legal in California, but they do not raise the one-month cap AB 12 already put on your actual deposit.

Deposit waiver and surety bond products are legal for South Bay landlords in 2026, but they exist alongside California's deposit cap, not as a way around it. Since July 1, 2024, Civil Code section 1950.5 has capped most residential security deposits at one month's rent. Deposit alternative products let a tenant pay a smaller non-refundable fee to a third-party insurer instead of a full deposit, but they do not change what you, the landlord, are legally allowed to collect or hold as a traditional deposit.

What AB 12 actually changed

Before AB 12, Civil Code 1950.5(c) let most landlords collect up to two months' rent as a security deposit on an unfurnished unit, and up to three months' on a furnished one. AB 12 rewrote that framework. It caps the deposit at one month's rent, full stop, regardless of whether the unit is furnished or unfurnished, for the large majority of landlords in California.

There is a narrow small-landlord exception. A natural person, or an LLC where every member is a natural person, who owns no more than two residential rental properties totaling no more than four units, can still charge up to two months' rent. That exception does not apply if the tenant is a servicemember. Active-duty tenants get the one-month cap no matter who owns the property.

Everything that functions like a deposit counts toward the cap. Pet deposits, last month's rent collected in advance, and any other upfront security payment are all added together and measured against that one-month ceiling, so you cannot restructure a two-month deposit as one month deposit plus one month pet deposit to get around it.

Where deposit-alternative products fit

A deposit waiver or surety bond product is a different transaction entirely. Instead of the tenant paying you a refundable deposit, the tenant pays a smaller, non-refundable premium to a third-party company, often structured as a surplus lines insurance product, which then indemnifies the landlord for unpaid rent, damage beyond normal wear, and similar losses up to a policy limit, the same categories a traditional deposit would cover. These products have grown more common specifically because AB 12 shrank how much cash a landlord can hold directly, and both tenants and owners have looked for a way to bridge that gap.

The legal distinction matters. Because the tenant's payment to the bond company is a premium, not a deposit paid to the landlord, it is not itself capped by Civil Code 1950.5 the way a deposit is. But you still cannot use one of these products to simultaneously collect a full one-month deposit and require the tenant to also buy a bond, if the combined structure functions as a way to exceed what the statute allows you to hold as security. If you are offering tenants a bond product as an option alongside a standard deposit, keep the two clearly separate in your lease paperwork, and make sure any bond vendor you work with is a properly licensed and admitted or surplus-lines-reported insurer, not an informal fee collection scheme.

What this means for you

A deposit-alternative product is a legitimate tool to offer applicants more flexibility on move-in cost, especially as rents rise across El Segundo, Hawthorne, and Gardena. It is not a loophole around the one-month cap, and pairing it with a full deposit incorrectly is exactly the kind of small landlord mistake that draws a tenant attorney's attention now that AB 12 has been in effect for two years.

If you would rather not track which deposit rule applies to which unit in your portfolio, that is what we do at Schofield.

This is general information, not legal or tax advice. Confirm with a licensed professional before you act.

Sources

1. California Civil Code section 1950.5, security deposit cap and small landlord exception
2. Assembly Bill 12, 2023-2024 Regular Session, California Legislative Information
3. California Apartment Association, new law limiting security deposits now in effect
4. California Attorney General, Know Your Rights as a California Tenant: Security Deposits

Last verified: July 2026.

Topics: playbook, security deposits, AB 12, leasing, compliance

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