FREQUENT QUESTIONS ABOUT COLORADO’S NEW LANDLORD TENANT LAWS
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Unless you have been living in a cave or a van down by the river, you know that the Colorado General Assembly passed four laws this last session which significantly impacted landlord tenant law. These laws are: Residential Tenants Health and Safety Act (Warranty of Habitability); Rental Application Fees; Landlord and Tenant Duties Regarding Bed Bugs; and Time Period to Cure Lease Violations. The Right to Cure bill became effective in May. The warranty of habitability and application fee law became effective August 2, 2019. The Bed Bug law becomes effective January 1, 2020.
THS has taught multiple classes regarding these new laws. We have also published multiple articles on the new laws as well. If you want to get a good overview and more specific details on the laws, you should read past editions of Landlord News starting in March of 2019. Given the tremendous and far reaching impact of these laws, we still receive questions daily about these laws. This month we address the most common questions we are getting on these laws. If your question isn’t addressed here, the situation desk is always one phone call or email away. Because we could only answer a handful of questions this month, we will answer additional questions in a subsequent edition of Landlord News. Mark will also take questions at our fall client lunches. Questions this month focus on the new Application Fee law.
What does the denial letter have to say?
If a prospective tenant’s application is denied, the application fee law requires the landlord to provide the Applicant a written notice of the denial that states the reasons for the denial. The law further states that “if the specific screening criteria cannot be directly cited because of the use of a proprietary screening system, the landlord shall instead provide the Applicant with a copy of the report from the screening company that uses the proprietary screening system. A landlord may provide an Applicant an electronic version of the denial notice required unless the Applicant requests a paper denial notice, in which case the landlord shall provide the Applicant a paper denial notice.”
The “reasons for denial letter” (RFDL) required under Colorado law should not be confused with the “Adverse Action Letter” required under federal law (the “Fair Credit Reporting Act” or FCRA). The thrust of an Adverse Action Letter under FCRA is to communicate to the declined prospect: 1) you took adverse action, i.e. you declined their application, 2) your adverse action was taken in whole or in part based on information contained in a Consumer Credit Report (CCR) provided by a Consumer Credit Reporting Agency (CCRA); 3) the declined tenant is entitled to a copy of the CCR on which such adverse action was based; and 4) disclosure of the contact information for the CCRA so the declined prospect may contact the CCRA to obtain a copy of their CCR.
The purpose of the Colorado RFDL is to communicate to the declined Applicant the “reasons for denial”. We have had a lot of discussions with many clients about the “reasons” tenants get denied and how specific they should be in the denial letter. Based on these conversations, we think folks are over thinking this issue. Applicants are usually denied due to credit, income, eviction record, criminal record, or poor references.
Accordingly, your RFDL should simply cite your rental criteria in the RFDL and that the applicant did not meet that criteria. For example, you were denied for insufficient income. Our rental criteria requires monthly income of three times the monthly rent. Your income is 2.5 times the monthly. Your RFDL should list all of the reasons for denial. Thus, your RFDL should be reduced to the four or five major criteria items that you focus on, and each one that wasn’t met should be included in the letter. For example, you didn’t meet our credit, income, and criminal background requirements. Yes, you can combine the Adverse Action Letter and the RFDL. However, individual operating procedures will need to be reviewed to determine whether, combining the two letters, is desirable or feasible. Remember, the RFDL must come from you and not your third-party credit screening company.
Based on what needs to be included in the RFDL, there is no “standard template” or form. Yes, the RFDL is a form letter in a sense but it is populated by variables depending on the facts of the application. Given this, Landlords that process larger volumes of applications will need to give significant time and thought to how the RFDL can be automated. Logically, these Landlords will need to have discussions with credit screeners to see if they are capable of automating these letters through programming. Landlords who deal with substantially less volume could have a standard form letter with check boxes and manually check off what applies. Obviously, this is not going to work for large multifamily clients who deal with hundreds or thousands of applications.
We would be remiss if we did not take this opportunity to tell the rental world what to avoid in connection with a RFDL letter. You should avoid hiding the ball, or otherwise not making it crystal clear to the applicant why they were denied. This especially means not relying on the “proprietary screening system language” in the statute. This will not play out well and will end up sucking down countless hours of your time.
Applicant is denied. You send out a letter that states, “We use a proprietary screening system and here is a copy of the report from the screening company that uses the proprietary screening system.” Because the applicant doesn’t understand the report, the applicant attempts to contact the screening company and gets the runaround. Who do you think the applicant will contact next? Even in the absence of a proprietary screening system, who do you think the applicant is going to contact if the reasons for denial are not clear? You, that’s who. Everyone already has enough to do. Avoid disputes and wasting your time by stating up front in clear terms why an applicant was denied. Bonus tip – amend your application to contain language that the applicant agrees to receive all communications regarding the application electronically, so you don’t have to provide any hard copies and have digital proof of statutory compliance.
What are holding fees and how to calculate them?
The intent of the Application Fee law is clear. Landlords are not to make 1¢ of profit from tenant rental applications. It is that simple. Thus, any cost, charge, or expense, during the application process, must not result in a profit to a Landlord. What is profit and what is a “cost” will be determined by the courts in future cases.
When an applicant is approved, standard procedure is to take the unit, the applicant applied for, out of available inventory. Prior to the applicant’s approval, the unit was available to be rented to any applicant. But now that the applicant has been approved, the unit is taken out of inventory. The unit is being “held” for the applicant. Generally, once approval is communicated to the applicant, the applicant is generally given three days to commit to a lease or back out. If the applicant signs a lease, the holding fee is credited to the applicant’s account, usually toward the security deposit. If the applicant backs out of the lease within the three days, the holding fee is returned to the applicant. If the applicant backs out of the lease after three days, then the Landlord retains the holding fee as damages for having the unit offline (out of inventory) for three days. Note – we recommend using the term “holding fee” and not “holding deposit” to avoid creating the impression that the holding amount is a security deposit subject to the security deposit statute.
Based on these SOPs, we advise clients to set holding fees at 3x the per diem rent. For example, if the monthly rent was $1800, then the per diem rent would be $60 per day, and the three-day holding fee would be $180. If you want to be conservative, you should set the holding fee slightly below the per diem rent to avoid any possibility of charging more than the per diem. Ideally, the holding fee for any unit should be based on the unit rent for that specific unit or unit type. If you can’t do this, then you would need to set the holding fee at 3x the per diem rent for your lowest monthly rent unit so not to potentially run afoul of the statute.
During discussions with clients, we found out that many Landlords do not make approved Applicants sign leases until their move-in date. For example, Applicant applies and is approved October 15 for a November 1 move- in or lease start date. Landlord informs the Applicant that they won’t need to sign lease until November 1st. However, Applicant reneges and won’t sign. In this scenario, Landlord is clearly out more than three days of rent. Based on this, several clients wanted to charge a lot higher holding fee.
There are two solutions to this scenario. One, Landlord could charge a significantly higher holding fee. However, at the time of payment, Landlord has no idea how this is going to play out. So, if Landlord charged a $500 holding fee and the Applicant informs Landlord within five days that Applicant doesn’t intend to sign, Landlord would then likely have to refund a portion of the $500. Thus, if you are going to charge higher holding fees, you are going to have to administer the accounting and refunding of the holding fees depending on the scenario.
The much better second solution is to simply make the Applicant sign a lease. A signed lease is much more valuable than any holding fee. If November 1 rolls around and the Applicant doesn’t move in, then the Applicant is fully liable for all damages incurred by the Landlord due to the Applicant’s breach of the lease. Assuming the $1800/month rent, the Landlord could easily get not only the three-day holding fee ($180), but could also ask for one-half month’s rent for each and every day the unit was offline, waiting for the Applicant to move in on November 1. The conversation would go something like this. “You potentially owe us thousands for breaking your lease, but if you pay $900 within three days, we will call it good.”
In response to this, we have heard two things from clients. One, “we heard that even though a tenant signs a lease it is not enforceable if they never move in”. Not sure how so many Landlords heard this or came to believe this, but this is simply not true. A signed lease is like any other executed contract: fully enforceable upon breach. Two, that sounds great, but then we have to collect from the person. A bird in the hand (cash in hand) is worth two in the bush (having to chase the tenant). Simple math demonstrates how far ahead a Landlord would be by getting signed leases. Take our scenario times 10. This means there are 10 tenants who got approved on the 15th but failed to move in on the 1st of the month for units that rent at $1800. If you charged a $300 holding fee, you have collected $3,00 in compensation for 150 days of lost rent at a per diem of $60 per day or 50 of the 150 days are covered. If the tenants all sign leases and you get one-half month rent settlements on just half of the leases you now have $4500 in compensation of 75 (one-half) of the 150 days are covered. Given the tenants’ significant liability on the leases, this is likely, and you probably would generate even more. Regardless, we guarantee that by making approved tenants sign leases you will be way ahead of what you are collecting now in holding fees.
Why can’t we include or add our “soft costs” to the application fee?
You can, as long as you can prove them. This is where the rubber meets the road. Remember, the intent of the new law is clear. Landlords can’t make a penny of profit on the application process. Thus, if you can’t prove your costs, the argument will be that it is profit and you have violated this new law.
Again, we have had conversations with many clients. Most have not been able to prove costs associated with an application above hard costs. We have seen all kinds of “analysis” to justify these costs. But at the end of the day, most analyses crumble based on a single question. The question is: if Mary Jones didn’t apply for unit #302 would you still incur those costs? The answer is almost always “yes”. All of the analyses we have seen attributes one or more employee costs to the application process. When employee costs are attributable to the application process, the question remains the same. If folks didn’t apply, would you still be paying this person. Again, most of the time the answer has been “yes”. One client was able to allocate costs directly to an employee because that was all the employee did. Thus, if people didn’t apply, she wouldn’t have a job.
As we have continually pointed out, these new laws are poorly written, and it remains to be seen how the courts are going to interpret them. Our team has been analyzing them and discussing them for nearly nine months now. It’s impossible to predict, but on this law, we think judges are going to look at it as a “but for” test. In other words, you only incurred the costs but for the fact the person applied. If you incur the costs regardless of whether somebody applies or not, this will be problematic. Obviously, Landlords have to factor the risk as well. How much money is involved, versus the potential exposure? Further, Landlords who run a dozen or so applications a year are a far less inviting target than a Landlord that runs thousands or tens of thousands.
Finally, we are weary of averages. The law allows you to charge your “average cost” but what that means and how the judges will rule on that remains to be determined.
Say your application fee is $50 based on hard costs of $28.50, and your “average” other costs of $21.50. If you get sued, and it turns out your average hard costs are $18.73, then the argument is going to be that you are charging more than your “average”. Does average mean last year’s costs? Last month? If your vendor drops its prices, does that mean you have to recompute your average? Because how “average” costs are determined could easily be subject to dispute, using average costs is problematic.
Why can’t we charge Administration Fees until the lease start date?
You can, but again you have to prove that they are based on actual costs, and that you aren’t making a profit. (See Answer to Question #3 Above). If a Landlord charges an Admin Fee prior to move-in, the Landlord has to justify the fee as an actual cost.
The bottom line on Admin Fees is that the amount charged is probably a fraction of the cost, time, and expense incurred by Landlords in procuring and processing a lease, as well as administering that lease during the lease period. Tenants have countless interactions with the onsite team, and thus Landlords spend significant time administering a lease and related maintenance issues both prior to and after the execution of a lease. But trying to specifically allocate these costs is difficult.
Under the law, a “rental application fee” means “any sum of money, however denominated, that is charged or accepted by a Landlord from a prospective tenant in connection with the prospective tenant’s submission of a rental application or any nonrefundable fee that precedes the onset of tenancy.” Accordingly, if an Admin fee is not charged in connection with the prospective tenant’s application or prior to the onset of tenancy, then it is not an “application fee” by definition and therefore not subject to the limitation.
Tenancy begins when the lease starts. Onset means at the beginning. If an Admin fee is not charged until the lease commencement date, then it is not charged “prior to the onset of tenancy”. Accordingly, Landlords that charge an Admin Fee on the lease commencement date do not have to justify it as an actual cost. Caveat – Landlords should not fall into the trap of automatically charging the Admin Fee at lease execution.
For example, Applicant applies. Applicant is approved for a November 1st move-in date. Applicant executes a lease on October 15, at which time the Landlord charges or collects an Admin Fee. Landlord has now charged a nonrefundable fee prior to the onset of tenancy. Landlord should have waited until November 1 to charge and collect the Admin Fee.
Landlords should change their leases to set forth the Admin Fee in the lease. The language could be added to the rent paragraph. In addition to the monthly rent, tenant agrees to pay a one-time lease and maintenance administration fee with tenant’s first month’s rent on the lease commencement date. Finally, landlords should make the Admin fee part of their disclosures to avoid disgruntled or surprised tenants. Disclosure of Application and Move-In Related Costs.