City of Seattle Passes Limits on Financial Leasing Obligations of Commercial Tenants

On December 12, 2023, the Seattle City Council passed at full council Council Bill 120643 to establish limits on certain financial obligations of commercial tenants that landlords may require in or as a condition of commercial leases in the City of Seattle. The Ordinance will become law on January 29, 2024 and will have significant impacts on many Seattle commercial landlords and tenants.

To What Financial Leasing Obligations does the Ordinance Apply?

The Ordinance relates to three financial obligations of tenants that are commonly included or incorporated as a condition in commercial leases: (1) personal guarantees; (2) security deposits; and (3) letters of credit.

  • A personal guarantee is an agreement whereby an individual (typically an owner of a business-tenant) agrees to be personally responsible for a specified duration of time for rent and other payments due under a lease, regardless of the business-tenant entity’s success. As such, if the business-tenant becomes unable to pay its obligations to the landlord, the individual guarantor is responsible for paying any obligations that the business-tenant owes to the landlord.
  • A security deposit is a payment made by a tenant to the landlord, typically prior to commencement of a lease, that the landlord retains as security for certain tenant obligations under the lease, to offset certain payments that the tenant does not make, to fund the costs of any property damage the tenant causes, etc.
  • Letters of credit are commitments by a bank or financial institution to pay a tenant’s financial obligations under a lease in the event the tenant does not do so.

Who Does the Ordinance Directly Impact?

The Ordinance applies to new lease agreements for real estate located in the City of Seattle intended to generate a profit and is used for commercial or retail activities (including, for example, restaurants), but excluding residential rental/lodging, office space, research and development laboratory space, medical practice, clinic, or dispensary, and farming or cultivation. Certain landlords are exempt from the new regulations including the federal, county, or local government, the government of any Indigenous Tribe, or the State of Washington or a body of the state.

What are the Impacts of the Ordinance?

The Ordinance provides the following new limitations:

  • The total value of any required security deposit and/or letters of credit shall not exceed the total value of the first month and last month of base rent payable under the lease.
  • The maximum personal guaranty that may be included in a commercial lease or in a separate agreement upon which a commercial lease is conditioned is the sum of (1) the first two years of base rent payments and (2) the total cost of tenant improvements made to the leased space borne by the landlord.

The Ordinance directs the Director of Finance and Administrative Services to prepare a summary of the new regulations and provide a copy of the summary to landlords and commercial tenants at no cost.

The new regulations only apply to new lease agreements after January 29, 2024, not lease renewals or existing lease agreements. As such, the regulations do not directly impact existing tenants; however, the Ordinance requires that landlords of commercial property distribute to any existing or prospective commercial tenant a copy of the summary prepared by the Director of Finance and Administrative Services. For existing commercial tenants, landlords must distribute the summary within 90 days after the summary is prepared.

If landlords do not comply with the regulations, the Ordinance provides that the regulations may be enforced by citations, city hearings, monetary penalties, and private rights of action.

If you have any questions about the status of Council Bill 120643 or how the new regulations may impact your business, please contact Stephanie Gero Dahlstrom or any of the attorneys in Montgomery Purdue PLLC’s real estate department.

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