Court Backs Tenants in Interest Dispute : Lawsuit: Ruling allows city to require owners of rent-controlled property to pay 5% rate on security deposits. Landlords’ group calls it discriminatory.

The state Court of Appeal has upheld the constitutionality of a city ordinance that requires owners of rent-controlled properties in Los Angeles to pay tenants interest on apartment security deposits.

Tenants rights advocates hailed the ruling Friday while landlords criticized it as discriminatory.

The court, in validating the 2-year-old law this week, reversed a lower court ruling that had favored a landlords group opposed to the measure. The Apartment Assn. of Greater Los Angeles filed a lawsuit against the city in 1990, shortly after the ordinance took effect.

The association’s suit alleged that the ordinance discriminated against owners of rent-controlled properties by giving owners of properties that are not rent-controlled an unfair advantage. It also contended that the ordinance illegally preempted state property laws and overstepped the city’s police power.

City officials, as a result of appeal court action, can enact the ordinance.

Craig Mordoh, a lawyer for the landlords, said he had not read the appellate ruling but was inclined to make an appeal to the state Supreme Court.

City officials have estimated that the interest payments would amount to nearly $60 million at the end of the first five years.

The ordinance affects about 480,000 rent-controlled units in Los Angeles, or about 60% of the city’s residential rental property. It excludes single-family dwellings, luxury properties and apartment units built after 1978.

It requires property owners to pay tenants interest on security deposits at a 5% annual rate. They must make the payments in lump sums at five-year intervals or when the tenant moves. To qualify for the payments, the tenant must live in the dwelling for at least one year.

Typically, landlords require tenants to post a month or two months rent as a deposit, which must be returned when the tenant moves. If the property is damaged, the landlord may use part or all of the deposit for repairs.

Now, landlords bank the security deposits and keep any interest, according to advocates for tenants rights.

“That is not fair because the security deposit belongs to the tenant, not the landlord,” said Larry Gross, executive director of the Coalition for Economic Survival.

His grass-roots tenants group, with the help of the Legal Aid Foundation of Southern California, filed a friend of the court brief on behalf of city officials when they appealed a July, 1991, Los Angeles Superior Court ruling favoring the landlords.

Paul E. Lee, director of litigation for the federally financed foundation, said his organization became involved because it “felt the city had done an inadequate job all along” of defending itself against the landlords’ lawsuit.

Gloria Dabbs-Mann, the assistant city attorney in charge of the case, was out of her office Friday and could not be reached for a response to his criticism.

Mordoh, the lawyer for the landlords, said the affected property owners face a double burden under the ordinance.

The 5% interest required by the ordinance, he said, is higher than the typical 3% interest banks pay on passbook savings accounts, which will require landlords to make up the difference. In addition, he said, the ordinance will create an accounting and bookkeeping nightmare for property owners burdened with limits on the rents they can charge.

“It’s just another administrative headache rental property owners are having imposed on them,” Mordoh said.

Charles Isham, a member of the landlords’ group, declined comment, saying he was not aware that the Court of Appeal had ruled.

Dan Faller, president of the 12,000-member Apartment Owners Assn. of Southern California, said his group is strongly opposed to the interest payments.

“We believe in the private market system whereby two consenting adults can make a contract without the interference of bureaucrats and politicians,” he said. “It’s a form of price control and it doesn’t work.”

Faller said the measure will raise the cost of housing and may cause some landlords to take actions that will cost tenants.

“Owners can require that tenants supply an insurance policy to cover damage, and that will cost a lot more than a security deposit,” he said.