Rent Payment Options For Landlords and Tenants  – Part 1

Rent payment options can encourage timely rent payment and help in reducing late rent or no rent.

Landlords should eliminate any obstacles to or excuses for tenants failing to pay the rent on time by making it easy for tenants to pay rent.  However, making it easy for tenants to pay rent should not come at the expense of the landlord’s business.

Rent payment policy decisions should be made after careful research and analysis of available options and the true cost to the landlord’s business operations. There are many innovative and interesting rent payment services now available for property management but they may not be cost effective for independent landlords. The degree of risk as expressed in each payment service option should be acceptable to current business operations. Sufficient landlord resources of time and money will be required to support rent payment management systems.

While a landlord’s rental policies may express his preferred method of rent payment, a landlord in some states is legally obligated to provide alternative payment methods. While a landlord does not have to offer every type of payment option available, he does have to make available his payment options to each and every tenant. The landlord cannot selectively offer different options to different tenants.

The lease agreement should clearly state rent payment policies including amount, due date, payment method, late fees, dishonored check fees, etc.

Traditional rent payment options of cash, money order, or personal check are now supplemented by technology-based options for multiple devices’ platform applications. For many landlords, tenants pay rent by check. Other tenants prefer to use rental “apps” to schedule and pay rent electronically.  What method tenants use to pay rent must conform to the rental agreement and the rental agreement, in turn, must comply with landlord-tenant statutes.

It can hold true that the simplest solution is the best solution. If adequate safeguards for safe handling of funds are in place and rental policies are enforced, any one of a number of payment methods could serve as the simplest and best solution to meet the needs of independent landlords.

In this part one of a two-part discussion on rent payment options the traditional rent payment methods of cash, check, and money order are discussed. A future article will discuss other options such as credit and debit card payments and electronic processing payment options. As technology changes, the marketplace changes, and such discussion of the so-called “apps” or other forms of online payments will necessarily be limited to those types of service available at the time.

Cash

Cash may be a simple method of rent payment but there are inherent risks for both landlord and tenant in cash payments. A cash only rent payment policy may not be allowed in some states by landlord-tenant statutes. There can be also be certain specific circumstances in some states that allow a landlord to require that rent must be paid in cash. If a tenant has presented a dishonored check (insufficient funds or stopped payment) for example, within the past three months, the landlord, with proper notice and documentation of a change in rent payment methods, can require the tenant to pay his rent in cash for a specified number of months before allowing the tenant to return to his former status.

A signed receipt for any amount of cash payment should always be given to the tenant with receipt detail documenting date received, tenant’s name, rental unit address, amount received, description of payment (rent, security deposit, late fee, etc.), and the time period covered by the payment.

Accepting cash for rent payment can make the landlord a tempting target for criminal activity. Care must be taken to protect the individual receiving the cash and procedures put in place to safeguard cash until deposited. A note of caution to landlords – if a tenant gives cash for rent and the cash came from an illegal act, such as drug dealing, under federal and state forfeiture laws, the government could seize the cash.

Likewise, there is risk to tenants when unscrupulous landlords accept cash for rent but “forget” the payment in an attempt to extort more money from the tenant. Without a signed, dated receipt the tenant has only his word against the landlord’s claim of non-payment.

A cash transaction for rent payment is a personal interaction between landlord and tenant, usually requiring a face-to-face meeting. Few tenants would mail a cash payment to the landlord or deposit cash in the landlord’s drop box. However such actions should not be discounted. A rent payment policy should clearly state the particulars of payment and the consequences of non-payment, including the burden of proof on the tenant for payment.

For cash payments, the landlord receives the benefit of ready money but must expend time and incur expense to meet with the tenant. These costs should be taken into consideration when developing payment policy.

Personal Checks

Accepting a personal check for rent payment has customarily been the simplest and most often used payment method. A check provides a clear record of payment. Account information contained on the check may also prove useful if the tenant defaults on his lease. Checks can be mailed or dropped off, limiting the amount of landlord-tenant interaction which some landlords may perceive as a benefit.

However, there is some risk when accepting rent payments in the form of personal checks.  If the tenant has insufficient funds in his account, the check “bounces” causing additional work for the landlord in collecting his money. In addition, a bounced check creates additional bank fees for processing overdrafts which must be added to the amount the landlord will need to collect. If the tenant orders the check to be stopped (even if already deposited) the landlord now has to start over again in rent collection. Bank fees for stopped payments may also be incurred and will need to be included in past due amounts. Tenants should be aware that passing a bad check is a criminal offense that is aggressively prosecuted in all states. This provides significant leverage with a tenant when collecting on a bad check.  A state’s Attorney General’s office can provide information on procedures to report bad checks.

Landlords should not accept post-dated checks.  A landlord can immediately cash or deposit a check having the current or a past date.  A post-dated check cannot be cashed or deposited until the date on the check.  Not only can the landlord not obtain the funds on the date the check is received, but the longer period increases the landlord’s risk of never obtaining the funds.

A post-dated check takes on the properties of a promissory note.  Accordingly, a bad post-dated check does not usually result in the writer being charged with a crime and the payee only has the recourse of serving a “pay or quit” notice or of suing for payment just as would be necessary to collect any other unpaid debt. This could mean in some states that a landlord has no legal to file an eviction action while the note is pending.

Cashier Checks

As a safeguard, some landlords require certified funds for move-in fees, deposits, and first/last month rents. A cashier’s check or a bank “counter” check is drawn made payable to the landlord that, when presented for payment, allows immediate collection of funds.

Third-Party Checks

Third party checks (even paychecks or IRS refund checks) and temporary or out-of-state personal checks should never be accepted for payment of rents or deposits. It is a better business practice to require the tenant to cash the checks and pay the rent in cash.

Money Order

A money order given for rent payment is processed in the same manner as a check payment. Money orders can be purchased from many retail outlets and government post offices. A financial institution may offer an equivalent service but use a different term to describe the money instrument. A signed and dated receipt with all pertinent details should always be provided to the tenant for his payment.

Conclusion

While easy and simple payment methods may enable tenants to pay rent timely, the landlord must ensure such payment methods are reliable and provide an efficient, quick transfer of funds into business accounts.

In Part 2 of this series we will discuss the efficiencies and effectiveness of credit/debit card payments and electronic processing transactions that can meet the needs of tenants while supporting business operations.

Question

I had a tenant evicted recently and the judgment was made for the outstanding rent plus expenses. I am still holding the tenant’s deposit. The tenant is demanding the deposit back. Can I hold back the deposit until the back rent is paid?

Answer

For most (perhaps all) states, unpaid rent and damages (not normal wear & tear), and costs of the eviction can be deducted from the security deposit. If the amount of the judgment is more than the deposit amount, you would then seek collection of the rest from the ex-tenant. If the amount of the judgment is less than the deposit amount, you would refund the difference to the ex-tenant.

Although not required in some states when a money judgment was obtained, you should, however, be sure to provide an accounting for any amount of the security deposit not returned to the ex-tenant and do so within the time allowed by your state’s law unless you are certain of your state’s law on the subject. Among the states, the time varies from 10 to 60 or more days. Some states require the tenant to provide a forwarding address and/or to formally request the accounting, but many do not. Some states have yet other variations. When not covered by state law and the tenant didn’t provide a forwarding address, mail it to the address the tenant had at your property. Accordingly, you need to check and follow the law of your state.

Failure to provide the accounting and the return of any balance of the deposit not consumed by unpaid rent, damages, and/or other expenses within the specified time can result in serious penalties in many states, some states potentially awarding the tenant damages of two or three times the amount of the deposit.

The fact that a landlord has a judgment of more than the amount of the deposit may not matter in in some jurisdictions when it comes to the penalty for failure to follow the deposit return/accounting law.

Lease Agreements Between Landlords and Tenants – Part 9

In Part 8 of this series we discussed some aspects of and issues related to commercial property lease agreements. In this Part 9 we’ll discuss some issues regarding termination of lease agreements.

Termination                                               

Termination procedures vary somewhat, depending on whether a month-to-month (or other periodic) tenancy or a fixed-term lease tenancy is ending. There are times when the landlord is prohibited from ending a tenancy. First, rent control laws in a small number of jurisdictions, of course, restrict termination. Second, landlords cannot end a tenancy in retaliation for the tenant exercising any right under the law. Third, landlords cannot end a tenancy because of discrimination against any classes protected by fair housing laws.

Month-to-Month

Month-to-month tenancies can be terminated by either the tenant or the landlord by proper notice in accordance with a state’s law. In most states, landlords do not have to provide a reason for termination, but there are some states or local jurisdictions that require otherwise. For most jurisdictions the notice period for terminating a month-to-month lease is 30 days, although some jurisdictions require more notice from the landlords, for example 60 days.

Most states require that the tenant provide 30 days of notice for termination of a month-to-month tenancy. However, some states have different requirements under certain circumstances. The lease agreement should include your state’s notice requirements for terminating tenancy and require that the tenant provide written notice to the landlord.

Check state and local laws where your property is located to confirm the correct notice periods and whether or not a reason for termination must be given.

Fixed Term

Usually a lease for a fixed term simply ends at the end of the term unless a new lease, a lease extension, or a lease renewal is executed prior to that date or the lease provides for an automatic renewal clause if not otherwise terminated by the landlord or the tenant.

Failure to Vacate

It is not unusual that tenants fail to vacate when they should. When this happens, the landlord has two choices: (1) continue renting to the tenant or (2) remove the tenant through eviction.

In most states, if a landlord allows the tenant to continue paying rent, a month-to-month tenancy with the same terms as the previous lease will be created. This means that the landlord must provide proper notice in order to change the terms of the continuing occupancy. It is best to include a lease clause that discusses conversion to a month-to-month tenancy whether or not state law covers the issue.

Landlords should notify the tenant that the tenant is expected to vacate the premises by the termination date. The notice should be provided at least 30 days or more if required by state law ahead of time and 60 days is better. If the tenant must remain a few extra days, the landlord and tenant should execute a written agreement regarding the matter.

The potential for a tenant failing to vacate as scheduled is a major reason among several reasons why it can be risky to execute a new lease with a replacement tenant prior to the landlord gaining possession of an indisputably vacant unit.

Eviction

A tenant who refuses to vacate at the end of a fixed-term lease or upon termination of a month-to-month tenancy or who fails to correct a noticed default on a material term of the lease (including non-payment of rent) can only be removed through the judicial procedure of eviction. For detailed discussions regarding the eviction process see our “9 Steps to Eviction” Mini Training Guide.

Early Departure

When a tenant leaves before the end of the lease term and without paying the amount remaining under the lease, he is considered to have “broken” the lease. The landlord has the right to re-take possession if/when it is certain that the tenant intended to depart for good and to rent the premises to another. In general, the tenant is liable for rent for the remaining months of the lease. In turn, the landlord has a duty to mitigate damages, that is, make reasonable effort to find a replacement tenant. Recovery for any losses from unpaid rent, property damages, and/or certain other expenses incurred due to the default by the tenant that are not recoverable from the security deposit may be sought through a lawsuit.

Extended Absence

In order to avoid questions of whether a tenant has made an early departure, the lease should have a clause requiring the tenant to notify the landlord of planned extended absences, with “extended” typically defined as more than 2 weeks. The landlord should also regularly view his/her rental property and note any things observed that might indicate that the tenant has “skipped.”

Other Issues

Termination of tenancy sometimes results in other problems for the landlord even when the tenant created no serious problems along the way. Potential problems include the following:

• Riding      down of deposit.
• Uncertainty      of possession.
• Abandonment      of personal property.
• Security deposit disputes.

Most of these problems can be avoided or at least greatly simplified by having the right clauses in the lease and following the law.

Riding Down Deposit

Some state laws expressly prohibit tenants from trying to use their security deposits as last month’s rent. However, whether or not the issue is covered by statute, lease agreements should prohibit riding down the security deposit rather than paying rent in advance for the final month of the tenancy. It should furthermore state doing so will subject the tenants to late charges for unpaid rent, to eviction proceedings, and a potential blemish on their credit records. If your state covers the issue by statute the statute itself should be referenced.

Uncertainty of Possession

Landlords should not take possession of the leased premises unless and until certain that the tenant has relinquished possession of the premises. Although this is only occasionally an issue, when it is, it can cause delays of at least a few days, and delays in collecting rent from a new tenant means lost income. It can even result in being sued by the ex-tenant.

The question of whether the tenant has actually given up possession usually becomes an issue when either (1) the tenant appears to be holding over after the expiration of a lease even though the tenant has not given notice of intent to do so or (2) the tenant appears to have abandoned the property in the midst of the lease term without have previously indicated that being a possibility. In the first case, the tenant has not (1) turned in keys, (2) written or phoned to confirm a planned departure, (3) given any other indication of vacating, or (4) removed all belongings from the property. In the second case, the tenant appears to no longer reside at the property even though months remain on the lease and some of his/her personal property remains on the property.

Minimizing questionable vacancy issues begins with including in the lease agreement clauses regarding procedures for vacating. That is, words as to what the tenant must do when vacating and what will happen if the tenant fails to act as agreed.

For example, in order to provide definitive knowledge of when possession has transferred, one clause could state that all belongings must be removed and keys must be returned when the tenant has vacated and that failure to do both will result in (1) continued accrual of rent, (2) charges for all costs related to disposing of the belongings, and (3) a locksmith charge and/or a new garage door opener if all items are not returned. Regarding the last item, landlords should always re-key all locks when the rental unit becomes vacant, but requiring return of keys can provide proof that possession had been returned to the landlord and allow the landlord to charge the departed tenant for rekeying and/or replacement of door openers when those items have not been returned.

Abandonment of Personal Property

Each state has its own laws regarding how a landlord must handle property that appears to have been abandoned by the tenant without any certainty that such was the intent. These laws vary from essentially no rules to extensive procedures that include secure storage and certain legal notices and the procedures requiring several months to complete.

In order to reduce the uncertainly regarding items left on the premises, a lease clause could state that any items left on the premises beyond the date of termination of tenancy shall be considered abandoned and may be disposed of as the landlord sees fit without contact with the tenant. While this is not certain to avoid liability in all states, it should at least provide some protection against the ex-tenant pursuing the matter.

Move-Out Letter

No matter how the tenancy is being terminated, a landlord should provide a letter to the tenant a couple of weeks ahead of the termination date. The letter should remind the tenant of a number of issues including reminder of certain ones specified in the lease. The letter could include the following:

• Expectations      regarding condition upon vacating including any specific items the      landlord wishes to list.
• Inspection      and move-out checklist procedures.
• Items      that can result in deductions from the security deposit.
• Need      to provide forwarding address for any potential deposit refund.
• What else must be done to      complete vacating – e.g., turn in keys.

Reminding tenants of what they agreed to when they signed the lease is particularly useful in avoiding disputes. Even when an eviction is underway, with the judge having given the tenant a period of time to vacate, a notice which reminds the evicted tenant that costs may increase if certain procedures required by the lease agreement (e.g., return of keys, cleaning, removal of all belongings) are not followed.