While many fees are perfectly legitimate, some fees add up to illegal discrimination.

These are tough financial times for landlords. With inflation crushing operating margins, you may be lucky to just break even. Yes, rents are rising. But in most parts of the country, increases aren’t nearly enough to keep up with the surging prices of energy, labor, materials, and other operating expenses. While the entire industry is feeling the pinch, smaller landlords are under particular duress. Adjusted for inflation, rental income paid to noncorporate landlords still hasn’t recovered to pre-pandemic levels, according to the Urban Institute. Adding to the stress is that many landlords are now having to tackle the long-term repairs and capital improvements they were able to defer during the COVID-19 pandemic.

In these conditions, maximizing additional sources of non-rental income may be the key to staying afloat. One source of such income are the sums that rental applicants and tenants pay to help landlords defray the risks and costs of operating—things like security deposits, application processing fees, and late rental charges. But while imposing such charges is perfectly legal and legitimate, certain kinds of fees can also get you into trouble under fair housing laws.

With that in mind, we’ve dedicated this month’s Coach to the fair housing implications of applicant/tenant fees, charges, and deposits (which, for simplicity’s sake, we’ll refer to collectively as “fees”). We’re also going to alter the standard format. As per usual, we’ll give you a quick briefing of the legal rules affecting fees. But instead of the usual set of “Rules,” we’ll ask you a series of questions requiring you to determine whether a particular kind of fee violates fair housing laws. We’ll then explain why that fee is either legal or illegal and conclude with a summary chart listing the kinds of fees you can and can’t charge.   

WHAT THE LAW SAYS

The federal Fair Housing Act (FHA) bans housing discrimination against any person on the basis of race, color, religion, national origin, sex, disability, and family status (these seven characteristics are called “protected classes”). Section 3604(b) of the FHA also bans discrimination “in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith.” State and local fair housing laws impose similar restrictions but extend them to additional “protected classes” the FHA doesn’t expressly cover, the most common of which include:

• Age and/or ancestry;
• Marital status;
• Sexual orientation;
• Gender identity and expression;
• Source of income (including but not limited to federal Section 8 housing vouchers); and
• Military status.

How Charging Fees May Constitute Discrimination

Charging applicants and tenants fees may be a form of discriminatory “terms and conditions” that run afoul of Section 3604(b). There are two basic ways that can happen:

1. Demanding fees may be a direct form of discrimination where they apply only to one or more protected classes—for example, requiring Hispanic tenants but not white tenants to pay an additional security deposit to cover property damage based on the illegal and unwarranted assumption that Hispanic people are more likely to damage their apartments; or
2. Charging fees may also be considered “disparate impact” discrimination that occurs when a policy or practice that appears neutral on its face has the effect of discriminating against a protected class. For example, while it might apply to all rental applicants and tenants, charging a fee for English translation services has the effect of discriminating on the basis of national origin, specifically people who come from non-English speaking countries.   

Charging Fees & Potential Liability for Disability Discrimination

Fees are especially problematic when applicants and tenants with disabilities are on the receiving end. Explanation: In addition to running afoul of the general ban on discriminating against individuals with disabilities, landlords and other housing providers may violate the FHA’s ban on refusing to:

• Make reasonable accommodations to rules, policies, practices, or services that are necessary for an individual with disabilities to fully use and enjoy housing; and/or
• Allow reasonable modifications to the unit or common use areas, at the applicant or resident’s expense, if necessary for the individual with a disability to fully use the housing.

Cardinal Rule: You’re not allowed to charge applicants and tenants with disabilities fees for exercising and asking you to honor their accommodation rights.  

YOU MAKE THE CALL:

IS THIS A LEGAL OR DISCRIMINATORY FEE?

Okay, now let’s apply these basic principles to the kinds of fees landlords commonly ask their rental applicants and tenants to pay. Your job: Determine if the fee that the landlord proposes to charge is legal or illegal. Then, we’ll let you know if and why you’re right or wrong about that that particular fee.

1. Security Deposits

Proposed Fee: A landlord wants to charge tenants a security deposit equal to one month’s rent.

Legal or Illegal?

Answer: Legal.

Explanation: Requiring tenants to pay a security deposit is an accepted practice and perfectly legal, as long as the rules are the same for everyone. What you can’t do is charge members of protected classes different amounts or impose different terms from those you’d apply when leasing the equivalent property to others who aren’t protected—such as asking a Black tenant for a $1,000 for security deposit for a one-bedroom apartment for which you’d ask a $500 deposit from a white tenant.

Example: A New York City landlord had to shell out $92,000 to settle charges of discriminating against Black applicants. In addition to lying about the availability of apartments, the landlord allegedly told Black prospects that they had to pay the first and last month’s rent as a security deposit after telling white testers that the deposit was only the first month’s rent [United States v. 61 Main Street Corp., S.D.N.Y., December 2, 2013].

Coach’s Tip: Many states and municipalities cap the security deposit amounts landlords can charge. However, in the context of fair housing, the actual security deposit amount has no bearing on liability, provided that the amount is the same for all tenants regardless of protected class.

2. Rental Application Fees

Proposed Fee: A landlord wants to charge rental applicants a $30 fee to cover the costs of processing the application.

Legal or Illegal?

Answer: Legal.

Explanation: As with security deposits, rental application fees are okay, as long as the fee amount is reasonable and all applicants pay the same fee without regard to race, religion, etc. It’s when you start cutting different deals to different prospects that you bring fair housing liability risks into play.

Example: A Florida rental agent allegedly offered to waive rental application fees for white applicants. Lying about apartment availability and using the lack of Black tenants at the property as a selling point added to the effect. By the time the dust had settled, the owner had to pay $214,000 to settle racial discrimination charges [United States v. C.F. Enterprises, S.D. Fla., August 27, 2009].   

3. Hold Fees for Housing Voucher Applicants

Proposed Fee: A landlord wants to charge applicants seeking federal or other housing vouchers an extra fee to hold the apartment until the voucher is approved.

Legal or Illegal?

Answer: Illegal.

Explanation: Charging additional fees to applicants and tenants who rely on housing vouchers or other government assistance to pay their rent would violate state and local fair housing laws banning source of income discrimination. It might also violate the FHA if there’s proof of its adverse effects on individuals of certain races or other protected characteristics.

4. Move-In Fees

Proposed Fee: Upon signing their lease, new tenants must pay a non-refundable fee to cover the cost of changing locks, creating new keys, revising building directories, reprogramming security systems, and other processing operations involved with moving in.

Legal or Illegal?

Answer: Legal.

Explanation: Move-in fee amounts, terms, and accounting may be regulated under state and local landlord-tenant laws, especially when, as is sometimes the case, they’re imposed in lieu of a security deposit. However, they don’t raise any red flags under fair housing laws, as long as they’re applied consistently and without regard to race, etc.

5. Late Rent Fees

Proposed Fee: A landlord requires tenants who pay rent more than a specified number of days after their due date to pay late fees.

Legal or Illegal?

Answer: Legal.

Explanation: Landlords have every right to insist that tenants pay their rent on time. As with move-in fees, late fees are legal as long as the terms and amount comply with applicable state and local rental laws. Late fees are also kosher under fair housing laws, as long as they’re fair and charged to all late-paying tenants. But there are two potential liability risks:

Weaponization: Landlords have gotten into trouble by using late fees as a tactic to drive out current tenants on the basis of a protected characteristic. Typical pattern: A landlord that has tolerated late payments in the past suddenly gets aggressive about charging late fees to target a tenant in response to some new situation with fair housing implications. Examples:

• A couple gets pregnant and the landlord doesn’t want a baby in the building;
• A white tenant marries or allows a person of color to move in;
• A tenant with a disability in a no-pets building requests to keep an assistance animal; or
• A tenant with a disability requests costly construction modifications.

Refusal to Accommodate: The Department of Housing and Urban Development (HUD), Department of Justice (DOJ), and courts have made it clear that landlords may have to waive late fees to accommodate a tenant with a disability if the disability is the reason the tenant must pay late. This may happen where a tenant can’t pay rent on time due to unexpected hospitalization for a disabling injury or where the tenant relies on disability-related assistance that arrives after the rent payment due date.

Example: A tenant asked for permission to pay rent after he gets his Social Security Disability Income (SSD) benefits on the second Wednesday of the month. The landlord refused and then tried to evict him for not paying late fees. The California federal court ruled that the tenant had a valid case for failure to accommodate. The landlord knew of the tenant’s disability and there was enough evidence to suggest that paying rent late was a reasonable accommodation [Galia v. Wasatch Advantage Grp. LLC, 2021 U.S. Dist. LEXIS 73982, 2021 WL 1516372].

6. Pet Deposits

Proposed Fee: A landlord permits tenants to keep pets in their apartment, provided that they pay an extra deposit to cover the costs of potential pet damage.  

Legal or Illegal?

Answer: Legal.

Explanation: This is where things can get tricky. You can avoid confusion by keeping these four facts in mind:

• Fact 1: Landlords have the right to require tenants to pay for the property damage caused by their pets;
• Fact 2: Charging a pet deposit is a perfectly legitimate way to hold tenants responsible for pet damages;
• Fact 3: The FHA requires landlords to waive pet deposits for tenants with disabilities who have “assistance animals”; and
• Fact 4: You can still require tenants with disabilities to pay for the damage caused by their assistance animals at the end of the lease.

Facts 1 and 2 are fairly straightforward. At the end of the day, it’s okay to make tenants post some kind of security—either a security deposit, separate pet deposit, or a combination of both—to protect against the risks of pet damages.

When it comes to pet deposits and fair housing laws, the key to the analysis is Fact 3. Remember that the FHA requires you to make reasonable accommodations necessary to allow individuals with disabilities to fully use and enjoy the housing you lease. Under HUD guidelines, waiving normal pet deposits and fees is a required accommodation if three things are true:

• The applicant or tenant seeking the waiver has a disability—that is, a physical or mental impairment that substantially limits one or more major life activities;
• The person making the request has a disability-related need for an assistance animal; and
• The animal with which the tenant will live is actually an assistance animal.

HUD defines an assistance animal as one “that that works, provides assistance, or performs tasks for the benefit of a person with a disability, or that provides emotional support that alleviates one or more identified effects of a person’s disability.” This is a very broad definition that isn’t limited to types of animals, breeds, or weights. Nor does it require the animal to have any particular form of training or certification. Just a few examples of assistance animals include:

• A cat that can detect and alert its owner of oncoming seizures;
• Emotional support animals (ESAs), like a dog that alleviates a tenant’s depression or anxiety; and
• A bird that alerts its hearing-impaired owner when the phone or doorbell rings.

An assistance animal is not a pet at all but something a tenant with disabilities needs to live in the apartment. HUD makes it clear that landlords can never charge a fee or deposit for an assistance animal, regardless of its policies and practices for pets of other tenants.

Example: The DOJ charged the owner and property manager of a 232-unit housing cooperative in New York City with disability discrimination for seeking to evict a tenant with disabilities for keeping an emotional support beagle in his apartment. Rather than risk a trial, the owner forked out $70,000 to settle the case [United States v. 118 East 60th Owners, Inc., March 2019].

DEEP DIVE:

Why Separate Pet Deposits May Not Be Such a Good Idea

Collecting a separate pet deposit provides extra protection in case the security deposit isn’t enough to cover the property damage inflicted by a tenant’s pet. At least that’s the theory. The problem is that some states ban landlords who collect pet deposits from using the security deposit to repair pet damage. In other words, the pet deposit that you might regard as supplementary protection is actually your only protection against pet damage. Thus, for example, a $1,000 security deposit + $500 pet deposit = $500, rather than $1,500, in pet repairs and cleaning protection.

Separation of security and pet deposits works the other way, meaning you can’t use pet deposit funds to cover non-pet damage. This puts you in a tough spot when tenants with well-behaved pets trash their apartment. In this situation, you might be much better off with a single $1,500 security deposit, rather than a $1,000 security deposit + $500 pet deposit. That’s why you need to talk to an attorney before deciding whether to charge separate pet deposits.

7. Security Deposit Deductions for Assistance Animal Damages

Proposed Fee: A landlord deducts the money it spent repairing the damage inflicted by a tenant’s assistance animal from the tenant’s security deposit.

Legal or Illegal?

Answer: Legal.

Explanation: Tenants are responsible for the damages their animals do, regardless of whether those animals are assistance animals or pets. Thus, while you can’t charge them a pet deposit upfront, you can make tenants with disabilities pay for any actual assistance animal damages after the lease ends. That includes deductions from security deposits to cover the costs of damages beyond ordinary wear and tear.

8. Reasonable Accommodations Request Fees

Proposed Fee: A landlord charges tenants with disabilities a fee to process their requests for accommodation.  

Legal or Illegal?

Answer: Illegal.

Explanation: As with lease applications, background checks, and other administrative inquiries, it costs money to process a request for reasonable accommodations. But unlike those other checks, you’re not allowed to charge tenants fees to determine if they’re qualified for reasonable accommodations. Period. Who says? HUD and the DOJ say—in 2004 joint guidance. The exact quote: “Housing providers may not require persons with disabilities to pay extra fees or deposits as a condition of receiving a reasonable accommodation.”

9. Reasonable Modifications Deposits

Proposed Fee: A landlord agrees to a mobility-impaired tenant’s request for reasonable modifications to make the apartment or common areas more accessible but requires the tenant to pay a deposit to defray part of the construction costs.    

Legal or Illegal?

Answer: Illegal.

Explanation: It’s illegal to make persons requesting reasonable accommodations pay a deposit to receive the accommodation. This is a common mistake that landlords make in the context of what are called “reasonable modifications,” or physical changes necessary to a permit a person with disabilities to have full use and enjoyment of the property, such as widening doorways or creating or altering accessible parking spaces.

Rule: Requested modifications requiring you to spend money may or may not be reasonable, depending on the costs, availability of less expensive, equally effective alternatives, and impact on your essential operations. But if you do determine that requested modifications are reasonable, you must make them at your own expense.

10. Reasonable Modifications Restoration Deposits

Proposed Fee: A landlord agrees to make reasonable modifications at its own expense but requires the tenant with disabilities to make a deposit to cover the costs of restoring the premises to their original condition after the lease ends.     

Legal or Illegal?

Answer: Legal.

Explanation: The FHA allows landlords to request an extra deposit to undo the reasonable modifications when the tenant leaves. But conditions apply:

• The deposit amount must be “reasonable” and can’t exceed the actual costs of restoring the apartment;
• The landlord must let the tenant pay the deposit “over a reasonable period”;
• The tenant must receive any interest the extra deposit earns; and
• It must really be necessary to put the apartment back the way it was—thus, for example, restoration would be unnecessary for widened doorways, installed grab bars, and other modifications the new tenant accepts.

11. Higher Security Deposits for Wheelchairs

Proposed Fee: A landlord requires tenants who use wheelchairs to pay a higher security deposit to cover any potential damages their wheelchairs inflict.   

Legal or Illegal?

Answer: Illegal.

Explanation: It’s discrimination to charge tenants a higher security deposit because they have disabilities. This is true even if you’re legitimately concerned that wheelchairs may smash into walls, wear out carpet, or inflict other kinds of damages.  

Example: A Pennsylvania senior living facility paid between $255,000 to $380,000 to settle charges of disability discrimination, including requiring tenants who used motorized and non-motorized wheelchairs to pay non-refundable deposits to cover potential damage to common areas [United States v. Heritage Senior Living, LLC, (E.D. Pa.), June 25, 2020].

12. Higher Rents for Extra Occupants

Proposed Fee: A landlord increases the rent of tenants who allow additional occupants to live in the apartment after signing the lease.

Legal or Illegal?

Answer: Legal.

Explanation: Charging extra rent is justified if there’s a legitimate, nondiscriminatory reason for doing so and the landlord consistently follows the policy with all tenants without regard to race, etc. This could be the case in a building that has limited capacity for water, heating, sanitation, and other vital systems, or where having the additional occupant significantly increases the landlord’s costs.

13. Higher Rents for Extra Children

Proposed Fee: A landlord increases the rent of tenants in a one-bedroom after learning that the couple is expecting their first child.

Legal or Illegal?

Answer: Illegal.

Explanation: Unlike an extra occupant policy that’s consistently applied without regard to protected class, charging extra rent for living with an additional child is a direct form of discrimination against families with children. This would be true even if the policy is based on building limitations to the extent you phrase and apply it as applying only to families with children.

14. Relocation or Transfer Fees

Proposed Fee: A landlord charges fees to cover the costs of transferring current tenants to a different apartment in the community.      

Legal or Illegal?

Answer: Legal.

Explanation: Again, it’s okay to make tenants responsible for transfer costs, as long as you require all tenants to pay those fees regardless of race, etc. Exception: Charging transfer fees would be discriminatory if the purpose of the transfer is to make a reasonable accommodation for a tenant with disabilities, such as transferring a mobility-impaired tenant to an apartment near accessible parking or from a high floor to the ground floor in a building with limited elevator service.

15. Early Lease Termination Fees

Proposed Fee: A landlord is willing to let tenants out of their leases early, as long as they pay an early termination fee.       

Legal or Illegal?

Answer: Legal.

Explanation: Landlords may end up losing a lot of money if tenants vacate their apartments before the term of their lease expires. Risks are especially high in soft markets where rental rates are in decline and substitute tenants are in short supply. On its face, there’s nothing illegal about a landlord’s asking tenants to pay a fee to end their lease early. But as with all other fees, lease termination charges must be imposed on a consistent basis on all tenants and not just those of particular races, etc.

Liability risks may come into play when the reason the tenant wants out of the lease is directly related to their protected characteristic, such as where a tenant suddenly has to move to a specialized care residence after suffering a disabling injury.

DEEP DIVE:

Lease Termination Fees & Domestic Violence Victim Discrimination

The FHA doesn’t say anything about domestic violence. However, a law called the Violence Against Women Act (VAWA) bans discrimination against victims of domestic violence in federally assisted housing. Domestic violence is also a protected class under the fair housing laws of four states (Illinois, Rhode Island, Vermont, and Wisconsin), as well as the District of Columbia. Five other states (Arkansas, Indiana, North Carolina, Oregon, and Washington) include language banning housing discrimination against domestic violence victims in their landlord-tenant laws. Other states have specific rules that landlords must follow when dealing with tenants who are victims of domestic violence that are akin to the VAWA rules covering federally assisted housing.

Where such protections exist, they typically require landlords to let tenants end their lease early without penalty to escape a violently abusive relationship, provided that the tenant furnishes them with proper notification and documentation. And that means you can’t charge early lease termination fees.

Example: A domestic violence victim told her landlord that she was being stalked by her ex-husband and wanted to end her lease early. The landlord said no. And when she abandoned the apartment anyway, he sued her for accelerated rent. The Pennsylvania federal court ruled that she had a legally valid claim for discrimination and should get the opportunity to prove it at trial. There was evidence that the lease clause requiring tenants to pay accelerated rent if they terminate early had a disparate impact on women, the court reasoned [Butler v. Sundo Capital, LLC, 2021 U.S. Dist. LEXIS 171736].

16. English Language Translation Fees

Proposed Fee: A landlord in a heavily Spanish-speaking neighborhood hires a translator for limited English proficiency (LEP) tenants but charges them a fee to cover the translator’s costs.

Legal or Illegal?

Answer: Illegal.

Explanation: Although LEP isn’t a protected class, HUD issued guidance in 2016 stating that discriminatory treatment of LEP persons is a form of discrimination that the FHA does ban—namely, national origin, and, in some cases, racial and/or religious discrimination. There are also express and strict prohibitions against LEP discrimination in other laws for HUD-assisted housing. Thus, while the law isn’t yet settled, charging fees for translation services necessary for LEP persons to be able to apply for and use and enjoy an apartment would clearly involve a degree of liability risk.

Permissible & Impermissible Fees, Charges & Deposits Under Fair Housing Laws

* Where fees, charges, and deposits are allowed, they must be:

• Consistent with state and local laws;
• Applied equally to all applicants and tenants without regard to race, etc.; and
• Waived where necessary to accommodate an applicant or tenant’s disability.