Feature

by Jamie Sternberg and Ted Kimball

To be a residential landlord these days can be very confusing. One area of confusion is what can be charged to a new or prospective tenant. There are generally three categories of charges: holding deposits, application fees and administrative fees. These titles are not universally used and the charges can be known by many different descriptions and phrases. However, for our purposes we will distinguish each of them by using these labels so you will know how to find and avoid the legal land mines.

Holding deposits are used when an applicant for tenancy wants to reserve the unit so the landlord does not rent to anyone else during the time the application is being processed. If the tenant is approved and then changes his or her mind about moving in, a holding deposit is charged and used to pay the landlord for any losses suffered by keeping the unit off the market. Typical holding deposits either require the forfeiture of the entire deposit or the deduction of a pro rata amount equal to the daily rent for as many days as the rental unit was taken off the market.

In cases where the entire deposit is forfeited, the deposit is considered a liquidated damage charge, which is not favored under California law. If challenged, the landlord must prove that the amount forfeited was an approximate amount of the actual loss suffered because of the applicant changing his or her mind. Some tenant attorneys claim that the holding deposit amount is legally part of the tenant’s security deposit, and an improper accounting would lead to landlord liability. Although we strongly disagree with this interpretation, it could be persuasive to some judges. We therefore recommend that our clients take the conservative approach and take out of the holding deposit only the pro rata amount of the daily rent loss associated with the time the unit was taken off the market pending the application process.

Application fees are imposed on prospective tenants only. They are governed by California Civil Code §1950.6. Pursuant to this statute, owners and managers cannot charge more than a certain amount per tenant for an application fee. The amount is subject to annual adjustments for inflation. The chargeable amount allowed in 2001 is $32.76.

An application fee may not be charged if a credit report is not actually run or if the owner or manager did not perform a personal reference check. Owners or managers are generally prohibited from charging application fees if there are no units available to rent. However, application fees may be charged if the applicant agrees in writing to have the report run when there are no current vacancies or anticipated ones. Otherwise, your alternatives are to run credit reports and process the application at your own expense, or wait to charge the fee and process the application when the applicant is at the top of the waiting list.

State law requires that the landlord provide a copy of the actual credit report used, if the applicant requests it. In the past, many credit reporting agencies prohibited their customers from providing a copy to the applicant.

If the applicant disputes the information on the credit report, we recommend that you refer the applicant to the credit-reporting agency. Do not attempt to negotiate what is on the report. If the applicant claims the information is wrong and resolves the dispute with the credit-reporting agency, invite him or her to resubmit an application for reconsideration.

The law also requires that an itemized receipt showing the actual charge for the credit report be given to the applicant. This receipt should also include the soft costs charged for the time and expense incurred by the owner/manager to obtain, process, and verify the application, including past rental history, current employment, bank accounts, etc. If the total cost is less than the fee that was collected, the remaining sum should be returned to the applicant.

You cannot charge one application fee for both a husband and wife unless you do so for all married or unmarried couples. Treating married couples differently than a single person is discriminatory in California. You must charge each adult the same fee, regardless of the relationship between the parties.

If you accept an application fee but decide to decline the application before you run the credit report, you must return the portion of the application fee that would have been charged to obtain a credit report. To avoid potential fair housing violations, you should always go through the same screening process for every applicant.

Although the law limits application fees, some landlords charge administrative fees to applicants who are accepted for residency. These fees are different from application fees because they are charged only to successful applicants at the time the lease is signed. In June 2000, the California Supreme Court decided in Kraus v. Trinity Management that a $100 nonrefundable administration fee charged by a residential landlord did not violate California’s security deposit laws. Kimball, Tirey & St. John provided an amicus brief to the court on behalf of the California Apartment Association. The court reversed the lower Court of Appeal decision, which held that the tier fees are illegal and an unfair business practice. The court reasoned that only fees paid to reimburse the landlord as a result of tenant conduct during the tenancy constitute a “security” and must be fully refundable. The court used Webster’s definition of the noun “security” in deciding the case, defining it as “something given, deposited, or pledged to make certain the fulfillment of an obligation.”The court reasoned that the administration fees that do not fall under this definition are not a “security” and therefore do not violate Civil Code Section 1950.5.

The imposition of reasonable administrative fees would not appear to be permitted under the ruling in Kraus. However, a tenant still could conceivably sue a landlord claiming that an administrative fee constitutes an unfair business practice, especially if the charge is more than what the landlord actually incurs. The body of law regarding unfair business practices is found in California’s Business & Professions Code, Section 17500 et. seq. The increased number of claims is strengthened by the fact that residential leases are generally considered consumer contracts. A long legal history recognizes that residential tenants have unequal bargaining power in their leases with residential landlords. If a tenant prevailed in this type of action, the court could order the landlord to return all collected fees, pay actual damages suffered and pay for the tenant’s attorneys’ fees and costs.

An informed property owner or manager should understand the differences between holding deposits, application fees and administrative fees. She or he should also understand the limitations of their application and make informed decisions regarding their use and practice.

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Ted Kimball and Jamie Sternberg are partners with Kimball, Tirey & St. John. The law firm represents residential and commercial property owners and managers throughout California. Questions regarding the contents of this article should be made by calling 800-338-6039 or visit their Web site at kts-law.com. © Copyright 2002.