New Commercial Lease Restrictions in Seattle: What Landlords Need to Know

On December 28, 2023, Seattle's Council passed Ordinance 126982, expanding the city’s Municipal Code (SMC) 6.104 and introducing new limits on security deposits and personal guaranties for new commercial leases within the city (the new ordinance does not apply to existing leases or extensions of existing leases).

What the Ordinance Covers

The new ordinance establishes clear restrictions on the financial terms landlords can require in commercial leases:

• Security Deposits and Letters of Credit: For new commercial leases, the combined value of any required security deposit and/or letters of credit cannot exceed the value of the first and last month’s base rent (as defined by SMC 6.104.020).

• Personal Guaranties: For new commercial leases, the maximum personal guaranty allowed is capped at the equivalent of two years’ base rent plus the total cost of any landlord-funded tenant improvements for the leased space.

• Circulation of Information: In addition to these new restrictions, landlords were also required to provide notice of the above to existing commercial tenants by August 15, 2024.

These provisions limit the amount of financial security a landlord can require, ostensibly to reduce the risk to guarantors and foster a more business-friendly environment for small companies.

Implementation and Enforcement

To ensure compliance, the ordinance mandates that Seattle prepare and distribute a summary of these new limitations, which landlords must provide to their commercial tenants. The ordinance also introduces an enforcement mechanism. The City can impose fines of $500 for a first violation and $1,000 for each subsequent violation. Moreover, each day a landlord remains in violation could be treated as a separate offense, although the precise circumstances where this might apply remain somewhat ambiguous.

Additionally, the ordinance grants tenants a private right of action, allowing them to take legal action if their landlord fails to comply with these new rules. The ordinance provides that a prevailing tenant may be awarded reasonable attorneys costs, plus damages, including any interest thereon. Alternatively, aggrieved tenants may be awarded “$20,000 per incident”  in lieu of actual damages.

Impact and Potential Unintended Consequences

The limitations introduced by Ordinance 126982 generally align with the current market norms for security deposits and the practical limits of personal guaranties.  It has been somewhat common for guaranties to include some form of limitation, whether a cap on total, or a sunset if there are no defaults after a certain time period. From our review, it is not uncommon for courts to restrict a landlord’s ability to recover 18-24 months’ worth of rent as liquidated damages under a personal guaranty.

However, the City Council’s intervention may bring unintended consequences. By restricting the financial security landlords can demand, the ordinance might inadvertently make it harder for small business owners to secure leases. If landlords can no longer rely on substantial guaranties or letters of credit, they may raise rents or place more emphasis on the tenant’s financial standing during lease negotiations. This could lead to small businesses requiring more revenue, cash-on-hand, or stricter screening processes, effectively making it more difficult for less financially secure businesses to enter into lease agreements— a result counter to the Council's goal of encouraging small business growth.

Practical Considerations for Landlords

Commercial landlords in Seattle should consider revising their lease and guaranty agreements to ensure compliance with Ordinance 126982. A practical safeguard is to include a provision stating that any financial requirements exceeding legal limits will not invalidate the lease or guaranty. However, not to worry, simply including language that does not expressly cap a personal guaranty to the first two years of base rent will not completely invalidate a guaranty.

If you have any questions about the ordinance or need assistance with compliance, you can reach out to the team at Holmquist + Gardiner  for guidance.