Which upfront rental fees are illegal? | Waccabuc NY Real Estate

Q: We’ve just moved into an apartment complex that charged us a nonrefundable “initiation fee” of $200, plus a security deposit (the maximum allowed by law). We knew about this fee, but it seemed cheesy for the landlord to be charging us for the routine duty of processing a new tenant. Is there any legal way to object to this fee? –Scot S.

A: Your question is quite timely. In November 2011, a federal district court judge in Boston faced a very similar question (at issue was an “amenity fee” that covered use of the pool, gym and grill). The judge decided that, under Massachusetts law, the fee was illegal. (Hermida v. Archstone, et al., No. 10-12083-WGY, D. Ct. Mass. 2011.) That’s going to result in big refunds to Massachusetts tenants: According to the National Multi Housing Council, Archstone is the seventh-largest landlord in the nation, with close to 74,000 units spread across 12 states.

The federal judge’s decision is quite clear and simple. Massachusetts allows landlords to collect upfront fees that “are not in excess of” the following: the first full month’s rent; the last full month’s rent; security equal to the first full month’s rent; and the cost of buying and installing a lock and key. The term “amenity fee” isn’t on this list.

But lawyers for Archstone argued that they could charge this fee as long as, when added to any other monies collected, the total did not exceed what Archstone could have collected in first and last month’s rent, security, and lock and key charges. Because Archstone didn’t charge these tenants for last month’s rent, a security deposit, or the cost of rekeying ($50), the sum of all money collected (including the fee in question) was, in fact, lower than what Archstone could have collected.

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In short, Archstone read the law as limiting only the amount of money collected; the tenants said it limits both the amount and the type of fee. The judge sided with the tenants.

Not all states insist that upfront, nonrefundable fees be counted toward the limit of permissible upfront payments. Many states apply limits only to money collected to guarantee performance under the lease (in other words, to cover damage and unpaid rent). In those states, nonrefundable fees like an amenity fee are outside of these categories and probably legal. But in states that strictly limit the amount of money collected at the start of the tenancy, tenants might have a shot at arguing that a landlord’s imposition of any fee not on the approved list is illegal. (Tenants in California already won this fight.)

Q: I rent a single-family house to a tenant who wants to give music lessons in the home. It’s legal as far as zoning is concerned, but I’m concerned about liability in case one of the students is hurt. Is there any way I can protect myself? –Martha S.

A: You’re wise to be thinking of this possibility now. Although it’s unlikely, it is possible that a student could trip, slip or otherwise become injured on your property. You don’t want to be liable for the claim or lawsuit that could result. You can protect yourself in two ways.

First, consider placing an “indemnity clause” in the lease, which will make the tenant financially responsible for any injuries suffered by students while on your property, if the cause of the accident is the tenant’s failure to maintain the property. The indemnity clause simply says that if you end up being sued by the injured tenant (which often happens, because the property owner is the “deep pocket”), any loss you suffer (such as attorney fees to defend yourself or a judgment against you) will be paid by the tenant.

Note that this might not work in many states if the cause of the accident is your faulty maintenance: Many states won’t allow commercial landlords to off-load their liability, and they may not allow residential landlords to do it, either.

Another way to protect yourself is to insist that the tenant obtain a liability policy, just as you’d demand of a commercial tenant in a commercial space. The policy, called “commercial general liability” (or CGL), insures the tenant against claims by injured customers or clients, and you can be added to the policy as an “additional insured.”

If a student sues, this means that the tenant’s policy will cover both of you. (Make sure that the tenant’s policy is described as “primary” to your own liability policy.) Demand proof of the policy (and your name on it) by asking the tenant for an “ACORD 25” form, which the insurance company will issue at no charge. The form will specify the type of insurance purchased, its coverage and limits, its expiration date, and that you’re an additional insured. Make a note of the policy period and be sure that you ask for an updated form when it’s time to renew the policy.