As an experienced landlord, you know that refunding security deposits to former tenants cannot be delayed. The fear of paying unnecessary fees and penalties is so engrained that it’s second nature for you to turn those refund checks around automatically within the required period. Now, we are seeing a trend with residential tenant application and administrative fees, which should cause you similar concern.
The Colorado Rental Application Fairness Act, C.R.S. § 38-12-901 et seq., (“RAFA”), applies to prospective tenants and landlords and governs application fees, administrative fees, and portable tenant screening reports used for residential rentals. In short, RAFA requires that a landlord/property manager in Colorado not charge an application or administration fee that is more than the actual cost to process the application. If the landlord charges more, the excess should be refunded within twenty (20) calendar days after processing the application. Upon the landlord’s receipt of a rental application fee, the landlord must provide either a disclosure of the landlord’s anticipated expenses for which the fee will be used or an itemization of the actual expenses incurred. If the landlord charges a $250 application and administrative fee, for example, the landlord has violated the statute if $250 is more than its actual cost to process the rental application and the landlord fails to account for the fee’s usage. Further, landlords must advise prospective tenants that tenants have a right to provide a portable screening report and that an application fee will not be charged if the tenant provides a valid portable screening report.
So, what happens if the landlord fails to comply with RAFA? For the landlord to be liable, the landlord must be provided notice of the RAFA violation and the tenant’s intent to file an action. If the landlord receives notice of a violation and the intent to file an action from the prospective tenant, the landlord has seven (7) calendar days to cure the violation (i.e., to return the difference between the actual costs incurred and the fee charged while including an itemization). In addition to curing the violation, the landlord must also pay the prospective tenant a $50 penalty. If the landlord does not properly cure the violation, the prospective tenant is entitled to $2,500 plus court costs and attorney’s fees.
While RAFA has been around since 2019, legislation in 2023 overhauled the penalty for a RAFA violation. A violation under the prior version of RAFA subjected the landlord to treble (or three times) the amount of the charged fee. Under the 2023 amendment, RAFA now subjects the landlord to a $2,500 penalty for a violation. As a result, class action lawsuits against property management companies and landlords for alleged RAFA violations are on the rise.
Generally, the legal complaints stem from a single prospective or current tenant, who submitted a rental application and was charged a rental application and/or administrative fee that exceeded processing costs. The tenant then sends the landlord written notice of the RAFA violation, which the landlord subsequently fails to cure. Based on the tenant’s written notice and the landlord’s failure to cure the alleged violation, an action is brought on behalf of a class of tenants who were charged an application fee and/or administrative fee in excess of the landlord’s actual costs.
For a large operator, it is not hard to imagine that a $2,500 per incident penalty could quickly turn into a million-dollar class action. Attempts to prevent class certification related to this issue have generally not succeeded. Trial courts have rejected arguments that the class action allegations should be struck because the putative class members failed to meet the RAFA notice requirements. In at least one of these cases, a Colorado court certified a RAFA administrative fee class opening the landlord to violations for all persons that were charged the administration fee from the date three years prior to the commencement of the case. California, Washington, Minnesota, and New York have also enacted legislation similar to RAFA.
Landlords should take careful note of RAFA and the potential for liability. Any application and administrative fee policies, including those in lease agreements, should adhere to the RAFA requirements. The only application fee and administration fee that should be charged is the amount it actually costs the landlord to process a prospective tenant’s application. Itemizations for the processing costs should be prepared and disbursed to the prospective tenant as soon as the administration or application fee is collected. Any fee collected in excess of the processing fee should be timely returned to the prospective tenant. A high-visibility protocol should be established to address RAFA notices where an application or administration fee was charged in excess of the application processing cost. Remember that a timely cure of the violation also requires payment of a $50 penalty to the prospective tenant.
The legislative landlord-tenant landscape in Colorado is consistently shifting. Proactive and adaptive procedures and protocols will keep landlords out of hot water from potentially crippling litigation.
Jon Brummet is a litigation and regulatory attorney at Ireland Stapleton Pryor & Pascoe, PC licensed to practice in Colorado and Wyoming.