Friday, August 28, 2009

Residential Landlord & Tenant Ordinance

What the ordinance is doing to landlords...

Like most forms of state intervention, Chicago's Residential Landlord & Tenant Ordinance (presumably) has positive intentions, but engender very negative unintended consequences. In this case, these negative consequences are not only experienced by landlords, but by the very tenants that they set out to protect.

Part A of ordinance 5-12-080 starts with the basically reasonable mandate that the landlord has to maintain the security deposit in a separate, interest bearing account. Part B goes on to state that the minuscule interest (1.26% in 2008 and 0.12% in 2009) has to be paid out every year, a fact that most landlords and tenants are not aware of.

Part F states that if the landlord violates this, they can be sued for 200% of the security deposit plus damages (legal fees). In some cases this means that good landlords have paid thousands of dollars for what accounts to little more than a clerical error.

I personally know several good landlords who feel victim to absurd, predatory lawsuits brought on by nefarious tenants seeking to gain a quick buck. Here is an actual example:

The landlord in question is honest and responsive. She works hard to meticulously maintain each apartment, as well as keep them affordable, in the face of rising property taxes.

At the end of two years one of her tenants decided to leave. The landlord promptly returned the security deposit along with interest, which in this case came out to under $50.

A week later the landlord is informed that she is being sued for 200% of the security deposit plus several thousand in "damages," which they somehow calculated as $15,000. Why you may ask? Because after the 1st year of occupancy she did not pay the tenant the $25 or so in interest. No one in their right mind can say that the "punishment fits the crime."

And in gets worse - the tenant's lawyer only receives payment via a portion of the money that his clients collect. On the other hand, the landlord has to pay her lawyer for every hour that he spends on her case, which in this case added up to several thousand dollars.

What this means is that the tenant has the power and incentive to drag the case on and bleed the landlord, often forcing them to settle. Out of principle this landlord has held steady, but I know others who have settled for as much as $10,000. And even if this landlord wins, the bastard tenant will have wasted her time and money. And of course her chances of counter-suing and recouping her legal costs from the tenant are slim to none. Needless to say this asymmetrical system provides great incentives for tenants to engage in predatory lawsuits.

In light of this legal environment, many landlords have determined that security deposits are too much of a liability and instead are requiring non-refundable move-in-fees, usually around $250. Without the security deposit to offset their risk, the said landlords have greatly tightened up their screening process. In particular they are much stricter on their credit, criminal, income, employment and rental history requirements.

So, one of the unintended consequences is that the housing options and opportunities for individuals of modest incomes, as well as minorities (who disproportionately have sub-par credit) have been reduced.

To adjust to the greater risks and liabilities that Chicago ordinances entail, landlords are spending more money on lawyers, accountants and insurance policies. In addition, fear and mistrust between landlords and tenants have increased. So, another unintended consequence is that less money is being spent on improving and maintaining properties for the benefit of tenants. Or, landlords can simply raise their rents and further erode the affordable housing stock that "progressives" so desire.

The increasingly complex and costly regulatory regimen that Chicago landlords are facing entails other troubling unintended consequences. Certainly these laws will fall heaviest on Chicago's many working class and immigrant landlords. Even those who are fluent in English will be challenged by rambling legalese and the increasingly complex regulations. And many of these individuals cannot afford the use of a costly lawyer. Accordingly these individuals and their families will be most vulnerable to educated, but unethical tenants who are simply looking for a quick buck.

In all heavy regulatory environments corporations enjoy strong competitive advantages over small, independent owners. Big corporations can bear added legal and clerical costs that can break smaller enterprises. So, it is quite likely that Chicago will witness an increased concentration of property in the hands of corporations. Of course this trend is even more pronounced in retail and manufacturing sectors. Unfortunately few "progressives" are aware of this connection. Unintended consequences are a bitch.


  1. I call B.S. The idea that being a landlord is the one business in which you need not be up on the laws regulating the industry, and never need consult an attorney as all other business often do, is what caused this problem. Life is complicated, and law is in constant dialogue with culture, as opposed to being a finished and perfected entity.

    People can sue for all the damages they wan. The idea of this being a jackpot is a myth that does not match court ractices.

    The fact that there are pitfalls for the unwary in any business is not news, and I'm sure for every landlord who gets sued for irregularities in deposit (honest or not) there are many more who squeak by providing the minimum or oftentimes less, in P.O.S. brokedown housing. I am not ready to shed a tear for either side, nor to abolish all protections.

    The fact is, there WILL be abuses - the question is whether what is allowed to each party should be codified, so both sides are operating with the same rulebook, or if it should be decided on a case by case basis, without structure of law, with wildly varying results.

    Knowing what to expect, and what you can or cannot do, is a boon for all.

  2. Dear Anonymous Poster:

    1. I do not disagree with your notion that landlord's (like other business people) should be well versed on the regulation that governs their field.

    2. But, the wisdom of some of the regulations is questionable.

    3. And there is no doubt that the "punishment far exceeds the crime."

    4. And as my post indicated that there are some unintended negative consequences that effect landlord and tenant alike.

    5. You are right that those who sue for heavy damages do not automatically receive them. But, the costs in time and money involved in defending yourself against BS suits forces most landlords to accept heavy settlements.

  3. I forgot to add that taxes and regulations are necessary in an a modern society. But, there is a limit to the burdens we can impose on businessmen, before they pack up and move to places where there are more reasonable financial and regulatory burdens. And when this happens (as is the case in California and Illinois) jobs go "bye-bye" and the burden is most felt by the working class.

  4. Anon,
    what other biz is subject to a 200% penalty? What other biz is so heavily skewed to favor the end user? By and large there are far more bad tenants than bad landlords. And there are far more protections for tenants then landlords.

  5. Anon,

    Your are so correct! A tenant who is well versed in the law can easily avoid paying rent for several months. And good luck collecting money from them.

  6. Sorry...I meant "The Way, you are so correct..."

  7. In some cases it's far more than a 200% penalty. The landlord in question neglected to pay $50 in interest and was fined $2,000 (twice the security deposit), so in a sense the fine is 40 times the error!

  8. Jason and Away you are so right in your statements, but let also throw into the hopper the hunger the city is to collect on any reviews that could be gotten. Most tenents cannot afford what many landlords have to pay in finds and unneeded repairs, (or so called repairs). My daughter just went to court, she was to have post a sign with her name and phone number on her building. I understand this helps the neighborhood when something has to be reported to the landlord. But this is being used more of a review maker then a education and crime proventive tool. So, once my daughter was instructed to post the sign she did, the judge slapped her with a 300.00 fine, and another 300.00 for not having it there in the first place previously. The last time I heard something like this was the mafia. What is this city coming to. Landlords, help keep people with roofs over their heads that can not afford a house in many areas of this city. For this to happen, it is ashame on the city, the court system and most of all the major that we all love.