BY JEFFREY C. TURK, ESQ. AND CAITLIN MILONE, ESQ.
Once again, the Massachusetts Appeals Court has reminded landlords of the statutory limitation on amounts which may be collected from an applicant. This time, the Court confirmed that so-called “hold” fees are not permitted. The rationale behind this decision rests on a very narrow reading of G.L. c. 186 s. 15B (the “Statute”) which provides that a landlord cannot accept any amount other than first month’s rent, last month’s rent, and a security deposit, each of which may not exceed the first month’s rent. Courts continue to interpret this law as containing an exclusive list of the charges which may be imposed at or before the commencement of the tenancy. What you call it matters. If a landlord seeks any other “fee” or charge not listed in the Statute, they are in violation of the law. Regardless of whether the amount is intended to offset an actual cost incurred (such as an application fee) or may be later converted into a permitted deposit, courts have deemed this to be an exclusive list of what you can accept and what each amount must be called.
In this case, the landlord accepted an amount to “hold” the apartment during the application process. While the amount was ultimately to be applied to the first month’s rent, the broker confirmed that it was intended as a deposit to “hold” the apartment. As such, the Court found that, regardless of how the landlord may have intended to apply it at a later date, it was, in fact, a “hold deposit”. Clearly, identifying an amount as a “hold deposit” is not permissible and violates the Statute. The more difficult issue is whether a “first month’s rent” deposit, which is expressly permitted by the Statute, can be retained by a landlord as damages if the tenant does not ultimately sign a lease. In other words, are the parties able to agree that, if an applicant fails to sign a lease once the application is accepted, the landlord can keep the first month’s rent to cover its damages arising from the applicant’s failure to execute the lease. While the Appeals Court did not specifically reach this issue as there was no such agreement in this specific case, the Court appears to have raised concerns in relation to keeping a permissible deposit based on the failure to sign a lease. Whether the Court would have reached the same decision if the amount had been clearly designated as a first month’s rent deposit and there was a specific agreement/contract in place confirming that the deposit would be forfeited if a lease was not signed is unclear. While the Court was clear that this decision was based solely on the specific facts in that case, property owners and managers should carefully consider whether they want to collect a first month’s rent deposit at the time of the application and, if the application is rejected, whether they retain these amounts. What this case does make clear is:
(a) Any deposit must be designated as one of the three (3) permissible forms of deposit (i.e. first month’s rent, last month’s rent, security deposit).
(b) If you do intend to have the deposit retained as liquated damages in the event the applicant fails to sign a lease, you must have a signed agreement specifically confirming same and signed by both parties; and
(c) There remains some risk that a court could consider any agreement to keep a deposit prior to the signing of the lease a violation of the Statute.
We understand that by interpreting this law to disallow deposits intended to compensate a landlord for removing a property from the market during the application process, and based on the prior cases prohibiting application fees, applicants have no reason not to file applications for apartments they either do not intend to lease or for which they know they are not qualified. However, owners and managers need to carefully consider whether they want to assume the potential risk of claims for accepting such amounts or retaining deposits for approved applicants that do not sign leases. While the business costs associated with processing such requests are significant, violations of this Statute entitle claimants to treble damages and legal fees and are often the subject of class actions. While we “hold” hope that, someday, the Massachusetts legislature will address this unfair result, for now, landlords should be aware of the issue and take action to address such potential claims.
The foregoing is for informational purposes only and should not be considered legal advice. Please feel free to contact our office if you have any questions or need assistance.