Legal Question in Real Estate Law in California

Yes, if the late fees are otherwise justified, they can be taken out of a security deposit - that's what the security deposit is for.

The "security" deposit is not to pay for a guard at night, or an alarm system. It is to "secure" your performance of the terms of the lease. If you do not perform, by failing to pay late fees, the landlord can take them out of the deposit at any time.