(Bolding added.) States vary on what the security deposit may be used for. I've not researched that for California. However, even assuming that it could be used in that manner, what you wrote that I put in bold is significant. Promptly notifying the tenant that the rent payment was not sufficient and that the landlord was taking the difference from the security deposit would put the tenant on notice that the landlord was not waiving the rent increase for that month. The key here is when the matter gets to court and the tenant claims waiver what evidence is there one way or the other to support the idea that the landlord waived the increase? If the only evidence is the that the landlord took the payments without saying anything at the time and then later there are simply the conflicting claims of the tenant and landlord about whether it was waived, the court may well find, as it did in the Alden case I cited, that the landlord waived the increase for those months. A landlord not wanting to take that risk should either refuse the payment altogether (which, as I said earlier would be my preferred solution) or to at least promptly notify the tenant in writing that payment was not enough, that the landlord was not waiving the underpayment, and outline the consequences should the tenant not cough up the underpaid amount.

