On December 12, the Seattle City Council passed Council Bill 120643 which will take effect later this month. The ordinance establishes new restrictions on commercial leases. First, it imposes limits on the maximum amount a landlord may require for a personal guaranty of the lease. And second, it imposes a limit on any required security deposit or letters of credit. The policy goals of the ordinance are summarized in the ordinance itself: “To the extent that a business owner incurs less personal-guaranty liability, commits fewer assets to a security deposit, and/or uses less credit capacity to maintain a letter or letters of credit in or as a condition of a commercial lease, that business owner will have greater flexibility to participate in positive investment opportunities for their business.”

Importantly, the ordinance applies to leases for all privately owned commercial property located within Seattle city limits, but excludes and does not apply to leases for the following activities: 

• Rental as a residence or for lodging
• Office space
• Research and development laboratory space
• Use as a medical practice, clinic, or dispensary
• Farming or cultivation

The ordinance will, however, apply to leases for commercial properties where the anticipated use is for commercial and retail activities that do not fall into one of the above. Examples include restaurants, retail clothing stores, and nail salons.

The ordinance imposes the following restrictions on new qualifying leases:

• Security. The total value of any required security deposit and/or letters of credit may not exceed the total value of the first month and last month of base rent.
• Personal Guaranties. The maximum personal guaranty is limited to the sum of (1) the first two years of base rent payments plus (2) the total costs of tenant improvements made to the leased space, including any tenant improvement allowance provided by the landlord, but excluding the cost of any tenant improvements paid for directly by the tenant.

The ordinance will take effect later this month, on January 29, 2024. These requirements do not apply to commercial leases executed prior to the effective date. 

The ordinance also includes notice requirements, penalties for noncompliance, and establishes a private right of action for noncompliance. Penalties for noncompliance include a monetary penalty of up to $1,000 per day after the first violation occurs, as well as allowing awards of attorney's fees for prosecuting a successful claim. The ordinance’s requirements will be summarized by the Department of Finance and Administrative Services for use by commercial landlords and tenants. The ordinance then obligates landlords to distribute a copy of that summary to any current or prospective tenant when a new property is offered for lease, and further requires landlords to provide a copy of the summary to any existing tenants within 90 days after the summary is prepared.

Whether you are a business owner considering entering into a new commercial lease or you are a commercial property owner within the City of Seattle, our team is ready to help you understand the implications of the ordinance on your existing leases and future negotiations.

Our team will stay apprised of the status of the City's summary of the ordinance and other related developments. For more information about the ordinance, please contact members of our Real Estate Team, including Matthew Markovich, Robert Garcia, and Emily Fenster. 

The information contained in this update is provided for informational purposes only. It should not be construed as business, legal, accounting, tax, financial, investment or other advice on any matter and should not be relied upon as such.