Washington Legislature adds to the Residential Landlord Tenant Act an option for a Fee in Lieu of Security Deposit

Traditional security deposits are collected from the landlord at the commencement of the lease. The funds are to be held in trust by the landlord to cover unpaid amounts the tenant is liable for under the lease agreement (though the amount of the security deposit is not a limitation on the tenant’s liability).  Typically, a security deposit will cost about the same as one month’s rent (landlords should consult local regulations for security deposit limitations.)  While security deposits are refundable if there is no damage to the property beyond wear and tear arising from ordinary use, many tenants cannot afford to pay a large sum up front, in addition to first month’s rent and other moving fees and costs.

As such, security deposits often become a barrier to affordable housing. The intent of the law is to provide landlords the option to offer the tenant pay a smaller recurring fee, in lieu of a lump sum security deposit.

House Bill 2064 was codified as RCW 59.18.670, providing a detailed explanation of the rules, requirements, and restrictions that apply when a landlord and tenant opt for a fee in lieu of a security deposit. Landlords and tenants should review the statute closely before deciding whether to offer, or accept, a fee in lieu of a security deposit.

Landlords are not required to offer the option of a fee in lieu of a security deposit. If it is offered by the landlord, and the tenant agrees to the fee in lieu of a security deposit, the fee is not considered rent and the tenant cannot be evicted for failure to pay the fee. The fee in lieu must be strictly optional to the tenant and the landlord cannot use the tenant’s option as grounds to deny their occupancy application. Further, if the landlord offers the option of a fee in lieu to one approved applicant, they must provide the option to all approved applicants. Landlords who materially violate the statute are liable to the tenant for two times the monthly rent, as well as reasonable attorney’s fees and costs.

If the tenant and landlord agree to this statutory fee in lieu, the landlord must utilize the fee to obtain insurance coverage for unpaid tenant obligations, including unpaid rent, unpaid fees, and damages in excess of wear and tear from ordinary use. The amount of the fee charged to tenants cannot exceed the actual cost to maintain and administer the required insurance.

When the damages are paid by the landlord’s insurer, the landlord cannot collect those amounts from a tenant who pays a fee in lieu. Unless otherwise barred, the landlord’s insurer may pursue the amount paid on the landlord’s claim directly from the tenant. The statute provides specific regulations on the timing and requirements for actions against tenants who pay a fee in lieu and entitles the landlord and/or insurance company to attorney’s fees for collection action.

The statute itself provides the disclosure form necessary when offering a tenant the option to pay a fee in lieu of a security deposit. The form requires the landlord to disclose the amount and type of insurance coverage maintained by the landlord.

What is the practical effect?

The fee in lieu option provides landlords and tenants with an alternative to the traditional security deposit lump sum payment. This law had support from tenants’ rights organizations as a means to remove barriers to housing and provide full disclosure of the landlord’s insurance coverage. The law also ensures landlords maintain insurance for most tenant obligations, including unpaid rent. The landlord’s insurance policy will typically cover more losses than could be resolved by a tenant’s security deposit.

The fee in lieu may also limit disputes between landlords and tenants, instead allowing insurance companies to sort it out, thereby reducing out of pocket expenses. While some landlord insurance policies may require the landlord pursue collection against the tenant before the claim will be paid by insurance, if insurance pays the landlord’s claim, the landlord cannot pursue the tenant for amounts paid by the insurance company. This may allow landlords more flexibility with tenants who are in arrears because the landlord will be compensated from insurance.

On the flipside, RCW 59.18.670 provides a detailed process for landlords, and their insurers, to collect unpaid amounts from tenants. Further, the statutory disclosure form puts tenants on notice that they are not a co-insured under the landlord’s insurance policy. Without that notice, the tenant could be considered a co-insured under the landlord’s policy.

Many of the practical effects of this new law will reveal themselves once the fee has been put into wider practice in residential rentals. Landlords and tenants who are considering the fee in lieu option should review the statute closely and consult counsel to determine if a fee in lieu is the right option and to ensure compliance with the detailed statute.