Over the last year, the Baltimore City Council has introduced and enacted multiple bills impacting rental housing that residential landlords will need to navigate:

• In May 2020, the City Council passed the COVID-19 Rent Increase Protection Act, which prohibits property owners from increasing residential tenants’ rental fees and collecting late fees during the state of emergency.
• A more recent law, that became effective on April 30, 2021, requires all new residential leases to include a provision that late fees may not be imposed until the tenant is more than 10 days past due with the rent.

There are two additional pieces of legislation that have yet to be enacted into law, but should be on the radar for Baltimore City rental property owners:

• Legislation requiring landlords to offer tenants a reasonable opportunity to renew their lease unless certain good exists; and
• The Security Deposit Alternatives Ordinance, which requires certain landlords to offer to accept one of two alternatives to upfront, full payment of the security deposit:
  1. Rental security deposit insurance; or
  2. Payment of the security deposit over a series of no less than 3 equal monthly installments.

The legislation requiring landlords offer an opportunity to renew recently received a favorable recommendation from the City Council’s Economic and Community Development Committee, so appears poised to be passed in early June.

The Security Deposit Alternatives Ordinance was recently vetoed by City Council. Because the Ordinance initially passed with a 12-2 vote, there was initial speculation that the City Council could easily override the Mayor’s veto of the legislation; however, as of May 26th, the Baltimore Sun reported there are a sufficient number of votes to sustain the Mayor’s veto with two councilmembers who initially sponsored the legislation—Odette Ramos and Zeke Cohen—having signaled they’ll join three other councilmembers in voting to sustain the veto.

Additional information about these bills are below. Rosenberg Martin Greenberg, LLP will be closely tracking the legislation and provide updates if their status changes or new information emerges. For more information about this legislation, or any matter impacting the Baltimore City real estate community, discussed above, contact any of the members of the Land Use and Zoning Practice Group at RMG at 410.727.6600.

1. Requirement to Offer Tenants a Reasonable Opportunity to Renew Leases Absent Good Cause – Expected to be Enacted in June 2021

Introduced in January 2021 and recently voted out of committee on May 18^th, if enacted, City Council Bill # 20-0031 would establish a requirement during the state of emergency (and 90 days after its expiration) that landlords must offer tenants “a reasonable opportunity to renew the lease subject to a reasonable, non-retaliatory increase in the rent or change in lease terms” at least “75 days but no more than 100 days prior to the end of a term lease or periodic tenancy.”

The legislation is aimed at stopping what has been described as a loophole that has been used to evict renters who would otherwise be covered by the CDC’s Eviction Moratorium or Governor Larry Hogan’s Executive Order providing a defense to an eviction if a tenant has suffered a loss of income due to the COVID-19 virus or state of emergency. The CDC’s moratorium and Governor’s executive order do not restrict a landlord from evicting a tenant who is “holding over” and remaining on the property at the expiration of a lease.

Others might describe the practice as the only way for landlords to remove tenants at the end of a lease term who have shown no intention to pay rent even after receiving financial assistance, and instead bring in new tenants who are willing to pay.

As drafted, landlords will be required to offer tenants a reasonable opportunity to renew a lease with a “reasonable non-retaliatory increase in the rent” unless a “good cause exception exists.” The codified good cause exceptions are:

i. The tenant has caused a substantial breach of the lease that warrants non-renewal, and after receiving written notice to cure or correct the breach, the tenant has failed to comply within 45 days;

ii. The landlord seeks to recover possession of the leased premises for use by the landlord or the landlord’s spouse, child, parent, or grandparent as their primary residence;

iii. The landlord seeks to permanently remove the leased premises from the rental market;

iv. The landlord, after having obtained all necessary permits, seeks to undertake substantial repairs or renovations that cannot be completed while the leased premises is occupied; or

v. The leased premises are owner-occupied and the landlord leases out a single rental unit on the premises.

If a landlord declines to renew a lease for one of the enumerated good cause exceptions, the landlord must send notice at least 75 days but no more than 100 days prior to the end of the lease term so advising.

The legislation, which may be enforced by issuance of a $1,000 citation, received a favorable report from the City Council’s Economic and Community Development (ECD) Committee, so appears on track to be enacted in early June following two procedural votes from the City Council.

Comment:

While the legislation is still pending, it has several issues that would ideally be resolved prior to enactment to provide clarity to landlords and renters, alike. For example, the legislation applies to all term leases and periodic tenancies, which includes week-to-week or month-to-month tenancies, but under the legislation, a landlord would be required to offer an opportunity to renew at least 75 days prior to the end of the lease. Additionally, the legislation does not define what is a “reasonable” increase in rent or change in lease terms, so a landlord seeking to comply with the legislation has no guidance on what is permitted.

Relatedly, the legislation raises constitutional concerns. For example, property owners with leases that already contain notice of termination provisions may have a colorable argument that the law violates the Contracts Clause of the U.S. Constitution by effectively overwriting the terms of existing agreements between landlords and tenants. A state law that “operate[s] as a substantial impairment of a contractual relationship” and is not “drawn in an ‘appropriate’ and ‘reasonable’ way to advance ‘a significant and legitimate public purpose’” violates the Contracts Clause. Sveen v. Melin, 138 S. Ct. 1815, 1821-22 (2018) (internal quotation marks omitted). The Law Department’s staff report on the legislation also notes that it would conflict with existing state law providing landlords the right to terminate a year-long tenancy with 90 days’ notice and a shorter period for other types of tenancies.

Bottom Line:

Owners of residential rental property in Baltimore City who are contemplating not renewing leases with existing tenants should carefully review the provisions of the legislation. Rosenberg Martin Greenberg attorneys are available to assist property owners in navigating the requirements of the legislation if enacted.

2. Security Deposit Alternatives Ordinance – Vetoed by Mayor Brandon Scott, City Council has until June 8, 2021 to Override

Passed in April 2021, the Security Deposit Alternatives Ordinance, City Council Bill #20-0022, was vetoed by Mayor Scott on May 17, 2021. Based on early tweets and reports in the immediate wake of Mayor Scott’s decision to veto, it appears the City Council President Mosby is planning to pursue a veto override. If a veto override is to occur, it would be at the next meeting of City Council on June 8, 2021. At this stage, it is still unclear whether there are enough votes in City Council for an override to succeed.

Summary of the Ordinance:

If the Security Deposit Alternatives Ordinance were to go into effect, it would apply to residential property owners who (i) own or control 10 or more rental units in Baltimore City, and (ii) require a security deposit of more than 60% of the monthly rent. Landlords that meet these two criteria would be required to include in new leases the offer to accept one of the following alternatives in place of a traditional security deposit (payment of 1-2 month’s rent, due at lease signing):

1. Rental security deposit insurance; or
2. Payment of the security deposit in no less than three equal monthly installments

For each alternative, the Ordinance establishes certain standards that must be met for the landlord to satisfy its obligation to offer the alternative.

Rental Security Deposit Insurance

The Ordinance requires rental security deposit insurance accepted by the landlord to satisfy the following criteria:

(a) the insurance provider must be an approved carrier licensed by, and in good standing with, the Maryland insurance administration;

(b) the insurance provider, policy, and coverage amount must be submitted to and approved by the landlord as an acceptable option in lieu of the required security deposit;

(c) the insurance provider must obtain from the tenant a signed acknowledgment on a separate sheet of paper with the following disclosure:

“The tenant understands that the periodic fee due under this contract is not a security deposit and will not be refunded under any circumstances to the tenant at any time.”;

(d) the landlord may not require the tenant to provide additional security or insurance coverage per claim in an amount greater than the amount required for security deposits; and

(e) any rental security deposit insurance offered shall meet the following criteria:

1. 1. The coverage is effective upon the payment of the first premium and remains effective for the entire lease term;
   2. The insurance must permit the payment of premiums on a monthly basis unless the tenant selects or agrees to a different payment schedule;
   3. The coverage provided per claim is no less than the amount the landlord requires for security deposits.

Use of Installment Payments

The other alternative allows for the total amount of the proposed cash security deposit to be paid in equal monthly installments, provided (a) there are a minimum of three installments, and (b) those installments become due and are paid with the monthly rent, unless otherwise agreed to by the landlord and the tenant.

Penalties

A tenant may seek relief to restrain or enjoin any violations of these provisions. Additionally, landlords leasing property subject to the Ordinance under a written lease that does not conform to the above-referenced provisions shall be guilty of a misdemeanor and be subject to a $100 fine.

Comment:

Challenges for Landlords/Property Managers

There are several logistical challenges that would foreseeably arise for landlords (and property managers) in offering either alternative to the traditional security deposit mandated by this legislation.

In the context of the rental security deposit insurance, the landlord would have to monitor the insurance provider’s compliance with the requirements set forth in the Ordinance. For example, the Ordinance sets forth the following requirements for an insurance provider:

(a) the provider would need to be an approved carrier, licensed and in good standing with the Maryland Insurance Administration;

(b) the specific coverage provided per claim would have to be no less than the amount required by the landlord for security deposits;

(c) the coverage would need to become effective upon payment of the first premium, with payment of premiums being permitted on a monthly basis;

Additionally, if the tenant were to cease monthly insurance payments, the landlord must consider what coverage it has from the security deposit insurance provider. The Ordinance requires tenants to pay security deposit if they fail to continue to make rental security deposit insurance payments; however, if tenant fails to do so, it is unclear if this is a breach that is “substantial” enough to warrant eviction.

In the context of installment payments, landlords will have logistical challenges in tracking deposit installment payments and will face challenges in adjusting for the risk if the property is left exposes if a default occurs prior to the tenant having paid the full deposit amount.

Controversy

Mayor Brandon Scott vetoed the Ordinance following an outcry from advocates denouncing the security deposit insurance alternative as creating a predatory scheme for low-income renters, who might ignore the disclosure requirements and anticipate a refund of fees at the end of the lease term. Or that renters would be surprised that the “insurance” does not cover them after a broken lease or damaged rental unit because after the rental security deposit insurance provider pays the claim to the landlord, it can pursue the tenant for repayment. This could all happen without the renter having a venue to challenge the landlord’s claim.

In reality, state law already contemplates the security deposit insurance alternative, allowing landlords and tenants to agree to the use of a surety bond “to protect [a] landlord against loss due to nonpayment of rent, breach of lease, or damages caused by the tenant.” Md. Code, Real Prop. § 8-203(i)(4). The difference here, for opponents, is that the Ordinance would push this option on all renters given that the security deposit insurance alternative appears to be a more attractive “security deposit alternative” to landlords since it won’t leave them exposed in the same way if the tenant defaults, whereas a tenant paying security deposit in installment payments who defaults after one month could leave the landlord uncovered.

The converse point is that coming up with large lump-sum security deposits is difficult for tenants, and given the additional hurdles created in evicting tenants, more landlords will be expected to request the maximum security deposit allowed to help mitigate their risk (two months’ rent)—thus making it more difficult for renters to come up with the upfront money to lease a rental unit. Additionally, from the low-income renter’s perspective, it is not especially feasible to obtain a lawyer and seek recourse in the courts when a landlord refuses to reimburse a security deposit for a broken lease or damaged rental unit. If a rental security deposit insurance provider acts unethically, an aggrieved renter may have an easier time seeking recourse through the Maryland Insurance Commission than filing a lawsuit against a landlord to return a security deposit.

Likelihood of Veto Override

Because the Ordinance initially passed with a 12-2 vote, there was initial speculation that the City Council could easily override the Mayor’s veto of the legislation; however, as of May 26th, the Baltimore Sun reported there are a sufficient number of votes to sustain the Mayor’s veto with two councilmembers who initially sponsored the legislation—Odette Ramos and Zeke Cohen—having signaled they’ll join three other councilmembers in voting to sustain the veto.

The City Council has until June 8 to override the veto. A spokeswoman for the City Council President, who supports the legislation, said he “is still evaluating all of our options.”

As new details emerge or the vote count changes, we will provide relevant updates.