Residential Landlords and Processing Fees on New Tenant Applications

Residential Landlords and Processing Fees on New Tenant Applications

California's Assembly Bill 12 (CA AB12) has been enacted to amend the tenant security deposit requirements for residential rentals in the state, which will become effective on July 1, 2024, changing the amount of security deposit a landlord can charge from two months, to one month.  There are two limited exceptions: 1) landlord is a natural person or limited liability company in which all members are natural persons; or, 2) landlord owns no more than two residential rental properties that collectively include no more than four dwelling units offered for rent, except if the prospective tenant is a service member, then the landlord can charge two month's security deposit. (Civil Code section 1950.5(c)(4)(A).)  The new law does not address what processing fees a landlord can charge a new tenant applicant to process the application, however a review of existing law, read in context with AB 12, leads to the conclusion that charging a tenant applicant  “processing fees” beyond the amount of fees actually incurred by the landlord, is prohibited.

Traditionally, security deposits were “limited to charges imposed to secure the landlord against future tenant defaults” (See Kraus v. Trinity Mgmt. Services, Inc. (2000) 23 Cal.4th 116, 141 (superseded by statute on other grounds as recognized by Arias v. Sup.Ct. (Angelo Dairy) (2009) 46 Cal.4th 969, 977 (predating 1/1/03 effective date amendment of Civil Code § 1950.5)). However, the Legislature has expanded the definition of “security” to also encompass fees imposed at the beginning of a tenancy to reimburse the landlord for costs associated with processing a new tenant. (Civil Code § 1950.5(b).) 

According to the legislative history, the inclusion of pre-tenancy “processing” fees within the definition of Civil Code § 1950.5 “security” prevents “greedy” landlords from charging nonrefundable tenant-initiation fees, or placement fees, to favor one tenant applicant over another. (See Comm.Rep. to AB 2330, 2002 Leg.Sess.) As a result, all fees that a residential landlord collects or charges to process a new tenant (as distinguished from Civil Code § 1950.6 “application screening fees,”) are refundable security regulated by Civil Code § 1950.5. Or viewed another way, except as otherwise allowed by Civil Code § 1950.6, the landlord cannot charge or collect and retain at the beginning of a tenancy fees to reimburse the landlord for costs associated with processing a new tenant. (See Comm.Rep. to AB 2330, 2002 Leg.Sess.)

Application Screening Fees Civil Code section 1950.6:

Civil Code section 1950.6, application screening fees, states in pertinent part:

(a) Notwithstanding Section 1950.5, when a landlord or his or her agent receives a request to rent a residential property from an applicant, the landlord or his or her agent may charge that applicant an application screening fee to cover the costs of obtaining information about the applicant. The information requested and obtained by the landlord or his or her agent may include, but is not limited to, personal reference checks and consumer credit reports produced by consumer credit reporting agencies as defined in Section 1785.3. A landlord or his or her agent may, but is not required to, accept and rely upon a consumer credit report presented by an applicant. (b) The amount of the application screening fee shall not be greater than the actual out-of-pocket costs of gathering information concerning the applicant, including, but not limited to, the cost of using a tenant screening service or a consumer credit reporting service, and the reasonable value of time spent by the landlord or his or her agent in obtaining information on the applicant. In no case shall the amount of the application screening fee charged by the landlord or his or her agent be greater than thirty dollars ($30) per applicant. The thirty-dollar ($30) application screening fee may be adjusted annually by the landlord or his or her agent commensurate with an increase in the Consumer Price Index, beginning on January 1, 1998.

Guidelines for Collecting Fees for New Tenant Applications:

To ensure fair practices and avoid any potential legal issues, landlords must adhere to the following guidelines when collecting fees associated with a new tenant application:

a. Fee Disclosure: Landlords must provide clear written notice before accepting any fees, including the purpose of the fee, the amount charged, and whether the fees are refundable or non-refundable. (Note – any fees collected that are incurred for application screening are considered refundable and part of the security deposit.)

b. Itemized Fee Breakdown: Landlords should provide tenants with an itemized receipt or invoice that displays the breakdown of the fees collected.

c. Fee Limitations: The screening fee must not exceed the actual costs incurred and should be reasonably and uniformly applied to all applicants. 

Conclusion:

It is always essential to seek legal advice or consult authoritative sources before implementing any fees or practices related to tenant screening or application processing.

Disclaimer: This blog post is intended for informational purposes only and does not constitute legal advice.