Seattle Commercial Landlords Must Take Action To Comply With Commercial Guaranty Ordinance

Following years of bolstering residential tenant protections, Ordinance 126982 marks one of the City of Seattle's first major forays into policing the commercial landlord-tenant relationship. The ordinance, which went into effect in January 2024, puts material constraints on many commercial leasing security deposits, letters of credit, and guaranties and imposes potentially severe penalties for noncompliance. It also requires that Seattle commercial landlords take affirmative action before August 15, 2024, to notify certain tenants of the ordinance and its requirements.

The ordinance prohibits commercial landlords in Seattle from accepting more than first and last month’s base rent as security – either in the form of a security deposit, letter of credit, or any combination of the two. It also places monetary caps on personal guaranties, prohibiting commercial landlords from entering into any personal guaranty that requires the guarantor to pay more than the first two years of base rent plus the landlord’s contribution toward certain tenant improvement costs.

Although it seems to have been aimed at protecting restaurant and retail tenants, the ordinance applies to all commercial leases in the city of Seattle EXCEPT leases for:

1. rental as residences or lodging,
2. office space,
3. research and development laboratory space,
4. medical practices, clinics, or dispensaries, and
5. farming or cultivation.

In May 2024, the director of the City Department of Finance and Administration published a summary explanation of the ordinance. By no later than August 15, 2024, landlords must send a copy of the director's notice to ALL their existing commercial tenants who would otherwise be subject to the ordinance [i.e., all commercial tenants other than those noted in (i) – (v) above]. Landlords must also send the director’s summary to tenants each time they enter into a new lease with the tenant or amend a tenant’s existing lease.

The law applies to all new leases as well as to modifications of existing leases and it carries stiff penalties for noncompliance. The city is authorized to impose fines of $500 for an initial violation and $1,000 for each subsequent violation, and the ordinance empowers the city to consider each day a person commits a violation as a separate infraction. The prohibited conduct is "entering into" a lease or guaranty, which ought to be a one-time event. Yet by providing for daily penalties, the city seems to have the power to fine landlords for every day they are a party to a prohibited lease or guaranty. If that interpretation is correct, it could result in substantial penalties. In addition to city enforcement, the ordinance provides affected tenants and guarantors with a private right of action, expressly allowing them to sue landlords for violations of the ordinance and to seek attorneys’ fees, costs, interest, and even liquidated damages of up to $20,000 per incident if actual damages are "unliquidated or difficult to prove," which may often be the case.

The ordinance raises numerous questions – e.g., how to compute the amount of tenant improvement costs that can be part of a personal guaranty; exactly what types of guarantees the ordinance covers; and what sorts of lease modifications trigger compliance requirements. Unfortunately, the director’s summary does little to provide clarity on these ambiguities. In the meantime, players in the Seattle commercial real estate market must wrestle with the implications of the new law and determine their policies and procedures moving forward in order to best comply with the law’s requirements.

If you have any questions or need assistance in planning for compliance with the ordinance or responding to a violation, please contact Michael Tarantino, Lisa Peterson, or any member of DWT’s real estate group.