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We are living in California. In our lease agreement, it states under the "condition" section:

Tenant acknowledges these items are clean and operable condition, with the following exceptions: Tenant acknowledges that the building and everything in it is new.

Now we plan to move out. The house has regular wear-and-tear, no excessive wear. The landlord says he will renovate the house at our expense to bring it back to "new" condition.

We say it is unlawful to demand a house back in "new" condition that has appropriate wear-and-tear. It also states in the contract:

All or any portion of the security deposit may be used, as reasonably necessary, to: (i) cure Tenant's default in payment of Rent (which includes Late Charges, NSF fees or other sums due); (ii) repair damage, excluding ordinary wear and tear, caused by Tenant or by a guest or licensee of Tenant; (iii) clean Premises, if necessary, upon termination of the tenancy; and (iv) replace or return personal property or appurtenances. SECURITY DEPOSIT SHALL NOT BE USED BY TENANT IN LIEU OF PAYMENT OF LAST MONTH'S RENT. If all or any portion of the security deposit is used during the tenancy, Tenant agrees to reinstate the total security deposit within five days after written notice is delivered to Tenant. Within 21 days after Tenant vacates the Premises, Landlord shall: (1) furnish Tenant an itemized statement indicating the amount of any security deposit received and the basis for its disposition and supporting documentation as required by California Civil Code § 1950.5(g); and (2) return any remaining portion of the security deposit to Tenant.

Who is right?

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    By the way, unrelated to your specific question, but something you may also want to check on, is you may be entitled to receive the interest on your security deposit which has accrued while in the account your landlord held it in. It depends what city you live in in California. – A.fm. Feb 14 '18 at 17:19
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You have acknowledged that the house was in "new" condition, which establishes a baseline for determining if the present state is normal wear and tear. The lease and California law agree that normal wear and tear is not the responsibility of the tenant. You may then need to sue the landlord in small claims court to get the remainder of the deposit (the above guide will be useful). The thing that is not clear is exactly what constitutes "normal wear and tear". The state guide tends to emphasize extreme forms of damage such as dogs chewing the woodwork, or cigarette burns. If you do ordinary cleaning on the walls, windows, carpets etc. then it is more likely that the judge will find in your favor.

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    It can also be useful for you to request an "initial inspection", as provided in Cal. Civ. Code §1950.5(f). At this inspection, which occurs before you move out, the landlord will need to provide you with "an itemized statement specifying repairs or cleanings that are proposed to be the basis of any deductions from the security the landlord intends to make". Then, take photos that show the actual condition of the deficiencies identified by the landlord. – rhymes_with_dorange Feb 14 '18 at 17:54
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The legal system is not always about who is right. I am not a lawyer.

I agree with the answer from user6726 that new just establishes the baseline for which to compare normal wear and tear.

Tell the landlord verbally and in writing you do not intend to pay for restore to new. Have a witness. Have record he was informed of your intention not to pay before he started the renovation.

Take pictures when you leave. Have it extra clean. If you can get a video of landlord inspecting.

Landlord will need to sue you for expenses beyond the damage deposit if you refuse to pay.

If the landlord does not return your damage deposit you will need to sue to get all or some of it back.

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