Questions continue to swirl around the subject of what kinds of fees can legitimately be charged to residential tenants and rental applicants. The law remains murky, meaning that landlords and brokers must proceed with caution.
Fees Charged By Landlords At or Prior to Term Commencement
Chapter 186, Section 15B of the Massachusetts General Laws (“Section 15B”) forbids landlords, at or prior to the commencement of any tenancy, from requiring a tenant or prospective tenant to pay any amount in excess of the rent for the first full month of occupancy, the rent for the last full month of occupancy, a security deposit equal to the first month’s rent and the cost of purchasing and installing a new lock and key. In an important 2014 decision, Perry v. Equity Residential Management, L.L.C., United States District Court Judge Rya Zobel declared that these provisions must be applied strictly and are “simply not susceptible of more than one reasonable construction.” She proceeded to invalidate the following fees charged by a landlord prior to commencement of the tenancy:
a $50.00 application fee per person;
an amenity or community fee ranging as high as $500.00; and
a $250.00 fee for the privilege of being allowed to keep a pet.
Massachusetts courts have likewise disallowed any amounts charged by landlords at or prior to the commencement of the lease term unless expressly authorized by Section 15B.
Fees Charged by Landlords After Term Commencement
Section 15B contains a separate provision prohibiting landlords, at any time subsequent to the commencement of a tenancy, from demanding rent in advance of the current month’s rent or a security deposit in excess of the amount otherwise allowable. In Perry, Judge Zobel took the position that the statute did not bar the landlord from charging a monthly pet fee of $30.00; because the tenants “became obligated to pay this fee after they were already tenants, they may not turn to Section 15B for relief.” She acknowledged, but respectfully disagreed with, a contrary 2012 ruling by Judge David Kerman of the Northeast Housing Court in Broad Street Associates v. Levine. In his view, Section 15B “makes no distinction between up-front deposits and recurring fees.” He also noted, however, that the landlord had not offered “any economic or other explanation or justification for the fees,” without clarifying whether that would have made a difference. He also pointed out that the landlord did not “characterize, or attempt to justify” the recurring pet fees as “additional rent”, implying that the landlord could have simply increased the rent in consideration of allowing the pet.
Whether the correct interpretation of the statute is Judge Zobel’s or Judge Kerman’s won’t be known until the issue is definitively resolved by an appellate Massachusetts court. In the meantime, landlords who impose fees after the term of a lease has commenced can seek to defend these charges on the basis of (1) Judge Zobel’s decision and (2) the fact that the charges have a sound economic basis (such as the additional wear and tear likely to be caused by having a dog in an apartment).
New Occupant Screening Fees
One particular fee which some landlords charge relates to the screening of a proposed new subtenant or roommate. In this scenario, the landlord is typically seeking to be reimbursed for costs like a credit report, processing a rental application, qualifying the new occupant and amending the lease agreement. If the landlord requires a new lease and the new occupant will not move into the apartment until the term of that lease begins, the analysis becomes a bit more complicated. Any fee charged by the landlord for screening the new occupant could be viewed as being imposed prior to the commencement of the new tenancy in violation of Section 15B. The landlord would take the position that, notwithstanding the new lease, this is really a continuation of the original “tenancy”, legitimizing any fee for screening the new occupant just as the monthly pet fee was permitted by Judge Zobel in Perry. In any event, the landlord could presumably recoup the cost of screening the new roommate by increasing the rent payable under the new lease.
Another type of fee, which is believed to be exempt from the statutory restrictions whenever charged, relates to additional services provided by the landlord to a particular tenant. The best example is a parking space, for which a separate charge is routinely made. Another illustration is offered by Gardner v. Simpson Financing Limited Partnership, decided in 2012 by a federal District Court judge and cited with approval by Judge Zobel in Perry. The landlord in that case utilized a lease form requiring tenants to maintain personal liability insurance in a minimum amount of $25,000, covering personal injury or property damage caused by the tenant or any guest. The landlord had arranged to obtain a master insurance policy to which tenants could be added. Those tenants who chose to participate were essentially required to reimburse the landlord for their proportionate share of the premium. Tenants also had the option of adding contents coverage for an extra charge, protecting themselves from loss if their personal property was damaged by fire or other casualty.
Some of the residents alleged that the premium charges violated Section 15B. The judge disagreed, characterizing the master insurance policy as an “additional service” made available to the tenants, who decided on their own whether to participate in the program. Admittedly, tenants were required to obtain liability insurance, but they were not compelled to use the landlord’s insurer. In the case of contents coverage, the decision of whether to obtain insurance at all was the tenant’s alone. It would, in the words of the judge, “elevate form over function” to penalize the landlord in these circumstances.
Contrast these fees with those charged for additional services which a tenant doesn’t want, like the amenity fee struck down in Perry. The same result was reached in Hermida v. Archstone, a 2011 case involving tenants who were charged a one-time $475 amenity fee for the right to use the property’s swimming pool, gym and outdoor grill. Although this fee was meant to be optional, the tenants were not so informed. Ultimately, they demanded a refund. The tenor of the Hermida decision clearly suggests that the result would have been different if the tenants were told that they needed to pay the amenity fee only if they in fact wished to take advantage of having a swimming pool, gym and outdoor grill on site. None of these facilities (unlike, say, a toilet or functioning heating system) is legally required to be made available to a residential tenant and there is no good reason why they can’t be withheld from tenants who choose not to pay for them. It seems clear that Judge Zobel would concur, given her characterization of the prohibited amenity fee in Perry as mandatory and non-refundable.
Commissions Charged By Brokers
Any amount which a landlord is allowed to charge can alternatively be collected through a real estate broker; the economic impact on the tenant is exactly the same. A more difficult question is whether a broker can impose charges in addition to those lawfully collectible by a landlord. That issue was raised in Samia v. McElaney, a 1983 decision handed down by the Boston Housing Court. The judge readily acknowledged that Section 15B prohibits a landlord from collecting a broker’s commission from a rental applicant. In Samia, however, the broker was not acting as the landlord’s alter ego. Rather, the broker’s firm was characterized as a “separate bona fide business operation engaged in locating apartments for tenants” even though the landlord was its major source of listings. Under these circumstances, the judge found “no prohibition” against the broker’s charging a commission to a rental applicant.
Other Fees Charged By Brokers
The same logic which permits a broker to charge a commission should apply as well to other fees. For example, a broker may wish to collect and process information (similar to what is contained in a rental application) with respect to a prospective tenant and/or order a credit report. The broker would essentially be taking the position that that part of its job is to investigate the desirability of the applicant; this is somewhat analogous to getting a prequalification letter from a mortgage lender in order to confirm that a would-be homebuyer will be able to pay for a house. Interestingly, an article in the April issue of Units, the publication of the National Apartment Association, suggests that the “fastest growing form of fraud today” consists of persons falsifying a rental application, for example by supplying a false social security number or landlord reference. The author recommends more careful scrutiny by “leasing teams”. Rather than charging separate application and/or credit report fees, some brokers may simply prefer to include those costs as part of their basic commission.
It must be emphasized once again that the law remains in a serious state of flux, preventing an authoritative pronouncement regarding the legitimacy of particular fees, especially those charged after the term of a lease has commenced. Members are urged to consult with their own attorneys.
Philip S. Lapatin, Esq.
Holland & Knight LLP
May 3, 2018
For any questions you may have, please contact GBAR Director of Risk Management & Legal Counsel William G. Mullen III, Esq., at firstname.lastname@example.org