Answer:

There could potential problems regarding the conversion of funds designated as a security deposit into payment of last month’s rent.

Whether you can use the tenant’s security deposit as the last month’s rent depends upon your state statute requirements for security deposit collection, handling, and return. Whether you should allow use of the deposit as payment of rent is a business decision. Most business owners would consider this practice a risky business decision.

Security deposits are not rent. The intent of a security deposit is to protect the landlord from any damage that the tenant may have caused to the rental unit during his tenancy. Damage can be physical damage to the rental unit or grounds, or financial damage such as loss of rents.

Most states have landlord-tenant statutes on security deposit handling that specify how a security deposit may be used by the landlord. Money held as a security deposit in most states may be used to cover back rents, physical property damage, and cleaning of the property when the tenant vacates the property.

Converting security deposit funds into rent could be a risky business practice. Until the tenant actually vacates and the final inspection is done, the landlord has no way of knowing what the condition of the rental unit will be at the end of the tenancy. Damage to rental units most often occurs during tenant move-ins and move-outs.

Usually the security deposit amount is the same amount as the monthly rent. If there is damage to the unit and the landlord needs to make repairs, the repair amount is deducted from the security deposit. This will reduce the amount that can be applied as last month rent. The landlord either has to cover the shortfall himself or file a lawsuit to try to recover the money.

The tenant may not be thinking of the potential liabilities that could cause him problems. If there is damage and shortfall in the amount that can be applied to rent, the tenant is responsible for the full rent. If the tenant does not pay, he has defaulted on his lease and the landlord has a cause for action. The landlord can sue for a money judgment which will be a matter of public record. The landlord could report the delinquency to the credit bureaus which could affect the tenant’s credit rating.

It matters not if the ex-tenant has moved to another state, as long as you can locate him and have him served with the summons and complaint. The fact that he would have to appear in the court of jurisdiction for the rental property might add incentive for him to pay up. If he fails to appear and you can provide the court proof that he was served you would likely receive a default judgment. This judgment can be enforced in a court in his new state. In most states judgments accrue interest at a significant rate. The judgment should appear in credit reports obtained by other landlords when he seeks other rental housing or when attempting to obtain financing for any need, forcing him to pay both the principal and accrued interest at a future date. Finally, judgments can be renewed.

Answer:

Most states have landlord-tenant statutes that regulate many of the issues of rents including raising rents, when rent is due, where rent is due, late fees, and grace periods. Rent is the legal obligation of the tenant in exchange for the use of the landlord’s rental property. Timely payment of rent is part of the contractual agreement between landlord and tenant. Late or missed rental payments by the tenant are contract defaults.

The landlord can exercise his legal right to remedy tenant default by serving proper legal notice of the default. If the default is not cured, the landlord can file an unlawful detainer action. Many times the late or missed rent payment is an oversight or a temporary issue that the tenant can quickly remedy. A landlord must address rent issues in a timely manner to remedy tenant defaults, protect against future risk, and help reduce operational costs. Accordingly most landlords include a clause in their lease agreement and as part of the rent rules that clearly details the issue of late rent and the consequences of default .By using financial motivations the landlord seeks to provide adequate incentive to the tenant to pay rent on time. Landlords should always enforce their rental policies in a legal, consistent, non-discriminatory manner.

The provision for a landlord to charge a late fee when the tenant has defaulted on timely payment of his rent may or may not be specifically addressed by statute. If addressed by statute, there are usually restrictions on the dollar amount or percentage amount that can be charged per month or per rental period; whether a daily late fee is permitted; and a maximum total amount of late fees that can be charged. In a few states the landlord must notify the tenant of the landlord’s intent to impose late charges. Some states may also specify a grace period, a specified number of days the landlord must wait before charging a late fee. Some municipality or rent-control ordinances may also govern late fees and grace periods.

In general, for a late fee to be legally enforceable, the provision for late fees must be clearly stated in writing in the landlord’s lease agreement. The amount of late fees should be, as detailed in in one state’s statute, “a reasonable estimate of uncertain damages to the landlord that are incapable of precise calculation.” A late fee is a form of liquidated damages, usually expressed as a fixed amount that approximates the damages a landlord will suffer if the rent is late. Due to the difficulty in determining actual loss by the landlord, a specific fixed amount for late fees is stated in the lease agreement. All parties to the contract should understand and agree to the late fee policy. Late fees that are excessive, greatly exceeding potential actual damages, could legally be considered penalties and lease agreement clauses on late fees may be ruled unenforceable by the courts in some states.

The late fee policy should clearly state the fee amount, when the late fee will be charged, and when the late fee is due.

How can a landlord determine if his late fees policy is reasonable and fair? The first step is due diligence to understand his state’s landlord-tenant statute on the issue. If the statute is clear on what amount of late fees can be charged, when late fees take effect, what, if any, notifications must be given to tenant, and how the payment must be applied, the landlord has his late fee policy established by statute. However, before setting his own late fee policy, the landlord may wish to contact other landlords of similar properties in the local area to ask about their late fees policy and amounts of late fees charged to their tenants. As a business necessity, a landlord may need to consult with an attorney experienced in landlord-tenant law and familiar with the local courts of jurisdiction for an opinion on a reasonable and fair late fees policy. What a court considers to be an unreasonable and excessive late fee may be dependent on the jurisdiction where the property is located. Some landlords use a percentage of the monthly rental amount as a late fee, typically on the average, 4 to 5 percent of the monthly rental amount. Other landlords prefer to set a fixed late rent fee, while others prefer a daily fee until a maximum limit is reached.

If the state statutes do not specifically address the issue of late fees, a landlord is obligated under general legal principles of contract law to set late fees to be reasonable and fair. Excessive amounts are subject to challenge by the tenant and could be viewed unfavorably in a court action.

How should a landlord apply a tenant’s rent payment? If the tenant pays the rent without including the amount of any late charges due, the payment should be applied first to the late charges and then to the earliest delinquent balance before the remainder is applied to the current month’s rent. A landlord can always evict for unpaid rent, while some judges may not allow eviction for unpaid late charges.

If late charges are waived for some reason, written notice of the waiver should be provided to the tenant with a statement that special circumstances were taken into consideration and that the subject waiver does not constitute waiver of any future late charges.

Grace Period

A grace period is a period during which late charges will not be incurred. While some states have requirements for a legal grace period before the landlord is allowed to serve a termination notice or charge late fees, in general, grace periods are provided because of the landlord’s generosity. Typical voluntary grace periods vary from 3 to 5 days.

Landlords are within their legal rights to insist that rent be paid on time and should take every opportunity to emphasize the importance of paying the rent on or before the due date. Tenants may mistakenly think that as long as they pay rent within the grace period they have paid their rent on time. Absent a state law regarding the issue, grace periods need not be considered a regular automatic extension of the rent due date. As an example, a lease clause could state that the grace period is an automatic extension that can only be utilized a certain number of times during the lease and that late charges will be incurred for payments after the due date once the allowance has been used. If a grace period is offered by a landlord, the landlord should clearly state in writing what constitutes the grace period, i.e., whether calendar days or business days and the specified time of day for receipt of payment, to make sure that landlord and tenant have the same understanding.

Washington, D. C.: The Rental Housing Late Fee Fairness Amendment Act of 2016

As advised many times in landlord help articles, landlords must act in their own best interests by conducting all due diligence on landlord-tenant issues and regulations. Keeping current with applicable federal, state, and local laws is a business necessity. As an example, landlords in the Washington, D.C. area now must comply with a new law that caps late fees and creates a grace period for tenants who pay late.

Prior to the passage of the “Rental Housing Late Fee Fairness Amendment Act of 2016”, a landlord in D. C. had no statutory restrictions on setting amounts for late fees and was not required to offer a grace period to tenants making late rent payments.

The Rental Housing Late Fee Fairness Amendment Act of 2016 provides:

• A housing provider may charge a late fee of no more than 5% of the full amount of rent due by a tenant.
• A housing provider may only charge a late fee:

1)    if the written lease agreement between the housing provider and the tenant informs the tenant of the maximum amount of the late fee that may be charged and

2)    if the tenant has not paid the full amount of rent within 5 days, or any longer grace period that may be provided in the lease, after the day the rent payment is due.

• A housing provider shall not:

1)    charge interest on a late fee;

2)    deduct any amount of a late fee from a subsequent rent payment;

3)    impose a late fee more than one time on each late payment;

4)     evict a tenant on the basis of the nonpayment of a late fee; or

5)    impose a late fee on a tenant for the late payment or nonpayment of any portion of the rent for which a rent subsidy provider, rather that the tenant, is responsible for paying.

Additionally after the grace period established pursuant to the provisions shown above, a housing provider may issue a tenant an invoice to be paid within 30 days after the date of issuance for any lawfully imposed late fees. If the tenant does not pay the late fee within the 30-day period, the housing provider may deduct from a tenant’s security deposit, at the end of the tenancy, any unpaid, lawfully imposed late fees, along with any other amounts lawfully due the housing provider.

A housing provider who knowingly or willfully violates provisions of the Act regarding a prohibited eviction for the nonpayment of a late fee, shall be liable to the tenant for the amount by which the late fee exceeds the allowable late fee, or for three times that amount in the event of bad faith, and shall be subject to a civil fine of at least $100 and not more than $5,000 for each violation.

A landlord’s policy of late fees and/or grace period may not motivate some tenants to a more timely rent payment. If defaults do occur, a landlord should be prepared to address the issue immediately with appropriate measures. Landlords who conduct adequate tenant screenings such as credit reports, eviction history, previous landlord references, and employment/income verifications, should be able to detect a history or pattern of late payments or other behaviors that could be indications of credit risk. A landlord should ensure his tenant qualification standards are adequate for business protection and that applicants are screened and selected to those standards.

Answer:

You are right to be concerned about issues with holding deposits. Misunderstandings and legal hassles are most often the reasons that cause problems for landlords and many landlords refuse to consider holding deposits.

However with careful consideration of issues and adequate documentation, a holding deposit can sometimes be useful in filling vacancies. If the rental market is tight, applicants may offer a holding deposit to take the rental unit off the market until the applicant’s screening and verification is complete. At other times, a holding deposit may seem appropriate when an applicant appears committed to the rental, but must make arrangements for the move-in funds. It is often, in a slow rental market, better to utilize a holding deposit rather than lower qualifying standards or reduce the rent.

As you know, a holding deposit is not a security deposit, but is to compensate the landlord for damages suffered for holding a unit off the market in the event that the applicant fails to meet screening qualifications or rescinds his/her agreement to rent the unit.

In summary, landlords must follow any laws of their states and they should use good judgment and be fair in their holding deposit policy. An applicant whose holding deposit is retained without adequate justification may well have a cause of action for damages against the landlord which can result in more time and expense than the deposit was worth.