
Quoting
250 LLC v. Photopoint Corp. (USA) (2005), 32 Cal. Rptr. 3d 296
The controversy in Granberry arose under section 1950.5, the security deposit statute for residential leases. The issue was "whether a landlord who in good faith fails to comply with the requirements of this statute may nevertheless recover damages for unpaid rent, repairs, and cleaning in a subsequent judicial proceeding." (Granberry v. Islay Investments, supra, 9 Cal.4th at p. 741, 38 Cal.Rptr.2d 650, 889 P.2d 970.) The landlords in Granberry owned or operated over 1,000 residential units, charged tenants an extra $100 for the first 31 days of occupancy, and never returned any part of that amount to the tenants. Approximately 10,000 tenants paid about $1 million in $100 first-month premiums, and a class of former tenants sued for return of those premiums on the ground that they were security deposits within the meaning of section 1950.5. Under section 1950.5 the landlord was required, within three weeks of the date the tenant vacated the premises, to provide the tenant with a written accounting for any portion of the security deposit the landlord retained; if the landlord failed to provide the accounting within this period the entire deposit had to be returned. The landlords in Granberry did not furnish the accountings, and it was determined that they had, in good faith, failed to return the first-month premiums as required by section 1950.5. The question presented in the case was whether the landlords 314 could nevertheless offset the premiums against damages for unpaid rent, repairs, and cleaning—liabilities against which security deposits could be applied under section 1950.5, subdivision (b). (See Granberry v. Islay Investments, supra, 9 Cal.4th at p. 742, fn. 3, 38 Cal.Rptr.2d 650, 889 P.2d 970.)
The court held that a landlord who has in good faith failed to return a security deposit as required by section 1950.5 can nonetheless recover damages for unpaid rent, repairs, and cleaning in a subsequent judicial proceeding. (Granberry v. Islay Investments, supra, 9 Cal.4th at pp. 749-750, 38 Cal.Rptr.2d 650, 889 P.2d 970.) The court reasoned that "the mere fact that the landlord has lost the right to take advantage of the summary deduct-and-retain procedure of section 1950.5, subdivision (f), does not lead to the conclusion that he has lost all right to claim damages for unpaid rent, repair, and cleaning, whether through setoff or otherwise." (Granberry, supra, at p. 745, 38 Cal.Rptr.2d 650, 889 P.2d 970.) The tenants argued that "to allow the landlords to raise setoff as a defense would be inconsistent with the equitable principle that an individual should not profit from his own wrong, because landlords may use this defense to keep all or part of the security deposits they retained in violation of section 1950.5, subdivision (f)." (Id. at p. 747, 38 Cal.Rptr.2d 650, 889 P.2d 970.) While the court "recognize[d] the importance of this equitable principle (see § 3517), and while [it did] not doubt that this principle may bar setoff on the particular facts of many individual cases, it does not justify an absolute bar to the right to a setoff in all cases." (Ibid.) The court observed in this regard that "a landlord that seeks setoff after good faith noncompliance with the procedures described in section 1950.5, subdivision (f), does not `profit from his own wrong,' because he cannot set off any damages he could not have recovered if he had complied with section 1950.5, subdivision (f)." (Id. at p. 748, 38 Cal.Rptr.2d 650, 889 P.2d 970.)
We read this last statement, as does Sherwood, to mean that a landlord that in good faith violates the security deposit statute may offset against its damages only those amounts which it properly could have claimed of the security deposit in the first place.