VOLUME 6 - ISSUE 3 LEGAL UPDATE
- Accumulated Utility Bills, Late Charges and The Tenant
- Statistically Measuring the Risk of Lease Default
- The Deceased Property Owner
- The Missing Lease
Accumulated Utility Bills, Late Charges and The Tenant
by Harry A. Heist, Attorney at Law
You just took over a property that has had 3 managers in the last 6 months. Needless to say things are a mess, and each day you find more money owed by tenants and inconsistencies in the rent records, receipts and especially the utility accounts and late charges. It is pretty clear that collection of these amounts was the last thing on the prior manager’s priority list, but your company is now faced with thousands of dollars in unpaid utilities and growing ledgers full of late charges and other unpaid sums. Can you simply bill the tenant and get paid? Not so fast. Collecting this money will be a “process”. Can you put the full amount of 4 months of uncollected utility bills and late charges on the on the Three Day Notice and expect to prevail in court? We certainly will not file the case.
With the economic downturn, the focus has been on collecting the base rent money. It is hard to turn away a payment of $900 because the $50 late charge was not included. While the tenant may be responsible for the payment of late charges, NSF fees and utility bills when they tender the base rent alone, the base rent alone is being accepted. The result is a build up in the other charges, including unpaid late charges building on top of other unpaid charges. Eventually the tenant’s ledger is a complete mess and nearly impossible to distinguish. When the next month comes along the tenant is given a Three Day Notice with the full amount owed, and again the resident simply pays the base rent which is accepted. If this occurs multiple times, the chances of collection diminishes, and the principle of law referred to as waiver may come into play. Some judges rule that prior uncollected late fees will be waived if base rent is subsequently accepted. Lease clauses indicating that all payments will first be applied to outstanding balances may or may not matter to this type of judge, particularly if there is a clear pattern of the tenant paying the exact base rent amount late.
Preventing the problem
What is a partial payment? Many managers will tell us that it is their company policy not to accept “partial payments”, but what they mean is that they don’t accept partial “base rent” payments but do in fact accept the base rent, even if a late charge or a utility charge is not included.
It is far easier to prevent the problem than to fix the problem. All a property manager needs to do is refuse any payment that is not the full payment amount under the lease terms and demand full payment only with no partial payment accepted. If the lease defines late charges and utility charges as additional rent, all of it goes on the Three Day Notice, and if the resident makes a partial payment, and it is the first time this is occurring, it should be returned to the resident immediately with the resident told in writing and in person if possible that no partial payments are accepted. Property managers who are most successful with collecting the full amounts owed all follow this method, and it sends a clear message to the tenant that the terms of the lease will be upheld and enforced by the manager.
Solving the Problem
Not so fast! The problem of accepting partial amounts cannot be solved overnight. You must first determine what is owed and create a collection strategy. Determining what actually is owed can be difficult in and of itself. If you have inherited a property and it has been mismanaged, often the records of amounts owed are not accurate, or they are difficult to sort out, because when money was received it was applied by the manager’s computer accounting software to monies owed with the balance being “rent“ on the computer ledger, but the tenant intended for rent to be paid. We recommend that unless the tenant has been given a receipt and a balance due statement each time a partial payment was accepted, if the rent is $700 and the tenant pays $700, it should be assumed that the tenant is paying base rent. Getting a tenant in line is a process that cannot be accomplished overnight and should not be attempted through the eviction process unless all else has failed.
1. Notify the tenant in writing that NO partial payments will be accepted in the future. Explain that the payment the tenant makes must include any utilities for the period used and any late charges for that period.
2. Demand the base rent and the late charge for that month’s payment on the Three Day Notice. We do not recommend you put the full amount the tenant owes on the Three Day Notice if it is a large accumulation of late charges and utility bills.
3. At the same time the Three Day Notice is served, prepare and Serve a Seven Day Notice of Noncompliance with Opportunity to Cure, and on that notice you will clearly state the balance owed to you for the past amounts of late charges and utilities. If it is confusing or you think the tenant may dispute the amount because of the past partial amount acceptance actions, attach a ledger to the Seven Day Notice. Make sure your ledger is accurate, because if it is not, you will really have a dispute later.
What will occur?
a. The tenant may attempt to pay the base rent as before. We feel this should be refused and returned to the tenant. Accepting this amount does absolutely nothing to solve your problem.
b. The tenant may attempt to pay the full amount owed on the Three Day Notice but not the amount on the Seven Day Notice. If you have also given the Seven Day Notice of Noncompliance with Opportunity to Cure for the other past due amounts, and your company is insisting that all these amounts be aggressively pursued, you would need to refuse the amount tendered pursuant to the Three Day Notice, because the tenant is still in noncompliance by not paying the amounts demanded on the Seven Day Notice of Noncompliance. However, now you are locked into filing a questionable Seven Day case. At the time the money tendered is returned, use this opportunity to explain to the tenant that the amounts must be paid in full and you will not accept anything less than the full amount or, if your company permits, enter into a payment plan with the tenant using the Past Due Amounts Workout Agreement.
c. The tenant may pay everything that is owed, but we doubt this will happen if the accumulated amount is high. If you get the full amount, congratulations.
Why use the Past Due Amounts Workout Agreement?
The Past Due Amounts Workout Agreement is like a promissory note, but it is used during a tenancy rather than after a tenancy. It allows you and the tenant to come up with a plan to pay the past due monies owed in a fashion that hopefully the tenant will be able to pay by converting any past due amounts into “rent”, and it makes the entire balance due and owing as “rent” if the tenant fails to pay per the agreement. This will allow you to place the entire balance owed on a Three Day Notice in the event the tenant fails to pay.
Best practices when accepting a partial amount
While it is easy for us to tell you to refuse a base rent payment or base rent including a current late charge that does not include the accumulated utilities or past accumulated late charges, we know acceptance of such payment will happen, and it may be your company policy. If you do this, we urge you to always immediately give the tenant an accounting showing exactly how the monies the tenant paid were applied. If they are applied to utilities and late charges first, make this perfectly clear, as the tenant will often use the defense in court that she has “paid the rent”. You want to be able to tell the judge that money was accepted and applied first to the other amounts owed and second to the rent, AND that the tenant completely knew it and understood it.
Not sure how to proceed?
If you are not certain how you should go about cleaning up seriously delinquent accounts, we recommend you call your attorney as ask for advice. Certain fact situations may require differing strategies. Always resist the temptation to simply put the full past due accumulated amount on the Three Day Notice.
Renewing a lease?
Never renew a lease unless all the past amounts are paid or you have asked your attorney for advice on how to address the amounts owed on the new lease. Failure to do this correctly could result in you completely losing any ability to collect the accumulated past due amounts.
(Back to Top)
Statistically Measuring the Risk Of Lease Default
By Michael Brown, Regional Sales Director, First Advantage SafeRent, Inc.
In a Slow Year, Best Practices for Managing Renter Credit Quality to Maximize Occupancy and Rents
It is nearly impossible to go a day without being reminded of the economic stress that is shaking the nation — as job losses increase and apartment living alternatives become cheaper, the multifamily industry is feeling the pinch. In 2008, apartment applicant traffic on a national, same-store basis was down 8% against the prior year.
Properties of each class showed similar decline rates in their same-store applicant volume: Class A properties were down 7.2%, Class B were down 7.9%, and Class C properties declined 8.1%. Our anylitics reveal that, at the market and portfolio level, resident demographics and operating performance varied widely.
In the year ahead, for many properties in many markets, apartment demand is expected to shrink further. It would not be surprising to see same-store demand off 10-15% by the end of 2009 over 2008’s low levels. Negative short-term drivers include;
1. An increase in unemployment rates throughout 2009, to levels not seen in the apartment industry in a generation. 25-34 year olds – the demographic group with one of the highest propensities to rent – are expected to have the highest unemployment rate.
2. Increasingly affordable home purchase terms, helped by falling home prices, low mortgage interest rates, and a new housing tax credit that reduces home purchase costs.
3. A historically large number of single-family homes for rent, still held by motivated owners.
These negatives will be mitigated by two familiar, longer-term apartment demand drivers: continuing immigration growth and the large number of “echo boom” consumers coming into their prime renting years. Also, demand for apartments may benefit from federal stimulus spending and related efforts to strengthen the housing, commercial credit and securities, and commercial banking sectors.
In the face of shrinking demand and greater industry attention to property operations, well-run operators and asset-managers are deploying these five industry best practices to maximize portfolio value.
Don’t Guess – Statistically Measure the Risk of Lease Default
Many companies maximize property value and net operating income (NOI) by using rank-ordered risk scores to accept those applicants that are the best qualified candidates to meet their lease obligations and renewals. Companies using statistical lease modeling benefit by using a tool that incorporates deeper data and can better predict the unique payment behaviors of renters.
Without a thorough picture of applicant history, operators needlessly admit those applicants that drive up skips and bad debt. Use of a screening company which offers landlord-tenant records and a statistical model that provides a validated risk score, presents a far more complete picture of an applicant’s overall likelihood to fulfill their lease obligations than using just credit by itself.
Without a statistically validated scoring model, properties are forced to make decisions on applicant risk that are more intuitive. This leaves companies in a position of guessing exactly which elements of their applicant selection criteria to change when the market changes – without having a way to measure the effect of such a change. For instance, in this currently soft market what do you change within your screening criteria to increase occupancy? Do you change the income-to-rent ratio? Or the number of trade lines?
More importantly, besides determining what to modify, you would have to determine how much to modify each element. It is important to understand that the impact of those changes is difficult if not impossible to gauge – until it appears as bad debt and delinquency increases in the portfolio’s financial statement.
Accept Only the Credit Risk Needed to Meet Operating Goals
Using a statistically validated score as a constant measure of applicant risk is essential to managing renter credit quality. When companies have the ability to rank order risk and differentiate among marginal applicants, owners and operators have an operating advantage, especially in a down market.
With a statistical model, you don't have to change how you evaluate an applicant to react to a declining market. What does change is your ability to proactively increase your risk tolerance. With a statistical model you have the ability to rank order applicants by risk enabling you to move the risk tolerance "bar" just far enough to capture enough "next risk tier" applicants to meet your properties leasing and occupancy goals. Taking the best-qualified applicants from available demand ensures that management has maximized its ability to push rents and minimized its exposure to skips and defaults.
In contrast, modifying individual criteria within a rule of thumb model creates uncertainty about the outcome – will tweaking a few rules lead a property to admit too many defaulting applicants? Will it inadvertently screen out those applicants that would have performed well if their likelihood of lease default had first been statistically verified?
Actively Manage Risk Tolerance Levels and Utilize a Conditional Range
It is very important to actively manage risk tolerance levels and utilize a conditional acceptance range at every property to maximize occupancy and performance. Maximizing additional risk tolerance strategies (increased deposit requirements, additional co-signer, and shorter lease terms) will help offset any additional financial risk that the property may incur. Additionally, utilizing the conditional range effectively can allow properties to expand their risk tolerance thresholds further than they normally would while achieving bad debt and occupancy goals. It has been demonstrated that imposing additional conditions on applicants will help improve resident performance.
Conversely, actively managing risk tolerance levels at properties that do not see a decline in demand is also important. If the demand is high relative to supply, properties can begin to tighten levels and focus on filling vacant units with the best, most highly qualified available traffic. Improving renter credit quality by tightening risk tolerance levels will help improve property performance by reducing bad debt and increasing lease fulfillment. Furthermore, we expect that residents with higher credit quality are more likely to accept increases in rent.
Forecast Demand Against Supply to Develop Marketing, Closing and Retention Strategies
Property- and portfolio-specific trends in renter credit quality, volume, and acceptance criteria are more important to operators than general national trends. In our experience, apartment properties that forecast upcoming expirations against projected demand are the exception, not the rule. Yet this data is readily available.
By applying the following simple calculations from your resident screening history, properties can yield valuable insight and pricing power when handling applicant traffic in 2009:
(a) Track a property’s volume and credit quality of applicant demand against historical levels. Look at the overall number of applicants in the same quarter one and two years ago. Anticipate that demand this year may be off 10-15% from last year’s volume, all else equal. Also, adjust for any differences in marketing (e.g., higher/lower budgets, improved online presence, improved prospect targeting) that impacted the numbers in one quarter but not the other.
Keep in mind that in most markets and property classes seasonality is a key reality of resident traffic. Your second quarter sees the greatest number and the best-qualified applicants, while quarters one and four show the least and weakest credit quality traffic. Thus, don’t expect the next 90 days to match the last 90 days. Instead, match the upcoming quarter against the same quarter a year ago.
(b) Forecast your upcoming available unit supply, based on current levels of expirations, renewals, and skips. Well-run properties today are going the extra mile to retain residents in the face of the slow year ahead – even at the cost of offering concessions under certain conditions.
(c) Subtracting demand (a) from supply (b). Do you anticipate a surplus of units or applicants in the quarter ahead? A substantial shortfall in applicants suggests you can/should take steps now to retain residents. An excess of projected applicants over available units should be considered with caution — after all, skips may go higher in 2009 given the anticipated increase in unemployment. But if you expect excess demand even under conservative assumptions, you may have a rare spot of pricing power at that property in the quarter ahead.
(d) Run your model to “stress-test” your assumptions with less demand than you originally anticipated. At the extremes, we have seen swings in qualified demand of +/- 30-50% in 2008 vs. the same quarter a year before.
Review Marketing and Resident Applicant Demographics
An ongoing and thorough review of marketing efforts, closing effectiveness and target marketing spend is crucial. Make sure you are reviewing the originating zip codes of your applicants and compare the acceptance percentage and risk scores from each area. You’ll also want to look at acceptance rates by marketing source to make sure the media bringing in the most qualified leases are getting an adequate marketing spend. Cross-reference this information to target the highest yielding zip codes with the most effective marketing communications to ensure you are driving in the most qualified applicants while practicing efficient marketing spending.
Also evaluate whether the scores, incomes, and prior rent trends of your applicant base is experiencing significant change. Are your properties attracting the same credit quality of applicants, just fewer of them? Or are scores and incomes of your resident population falling off compared to prior measures at the same time your applicant volume is on the decline? The latter case may suggest more significant repositioning, target marketing, curb appeal, and site-level management efforts are needed.
Property operators and asset managers can expect extra time in the spotlight in what promises to be a rocky year ahead. To respond, well-run companies are rank-ordering applicant risk, actively managing credit criteria in response to market conditions, and using property-specific operating history to inform key operating decisions. Using these simple but powerful best practices, strategic operators can attract the best and largest share of a diminishing pool of qualified applicants, meet operating goals, and position properties to weather the economic uncertainty ahead.
About the Author: Michael Brown is Regional Sales Director for First Advantage SafeRent, Inc. He can be reached at (Back to Top)
The Deceased Property Owner
by Harry A. Heist, Attorney at Law
You have been managing the property for a single or widowed elderly out of state investor, when suddenly you receive word that your owner is deceased. The rent checks are still coming in, and normally you would deposit the checks, take out your commission and send the balance to the owner. The owner’s son asks you to send the checks to his bank account. Knowing it is the owner’s only child, you oblige. To your surprise, 4 months later someone claiming to be an heir is demanding you send her the money. Conflicting demands? You may be in trouble now. As our population ages and so many people have invested in rental property, the chances of this happening increase each year. How you deal with the situation could mean avoiding a lawsuit or being pulled into a probate case. Obviously if the owner is married or there are multiple owners on your property management agreement, this will most likely not be an issue.
You were not aware of the owner’s death
Some property managers have gone many months without any contact with the property owner. If the rent is coming in and the manager is doing their job, often there is no need to contact the property owner. If you have been remitting payment to the owner and were not aware of his death, there would be no liability.
You have been notified of the owner’s death
As soon as you are notified of the death of the owner, you can either cease sending the money as before and hold the money in your escrow account, or you can make the check out to the “Estate of ___________” and continue managing and sending the payments.
Who to take direction from
It is a natural reaction to feel that you can take direction from someone who you know to be the sole heir of the deceased. It is possible that you knew your owner was ill for some time, and the son or daughter had been dealing with you and handling the parent’s affairs. Once the owner dies, the son or daughter that you had been dealing with has absolutely no authority by law to act on behalf of the deceased parent. A probate estate must be opened, and someone, probably the son or daughter, will be designated by the court as the Personal Representative or Executor. Different states have different names for the same thing. You will need to get a court document showing who this person is, and when that time comes, you can comfortably disburse the escrowed money to “the Estate of _____” The personal representative may want you to continue managing, but more often will wish to sell the home. This is a good opportunity to try to get the listing, or if you are not involved in sales at all, refer it to an associate.
Are there other owners?
If a person properly planned to avoid probate prior to death, they may have placed a child or children on the deed to the Florida property, but you were not aware of this. In this case, you can continue to sent the rent proceeds to the living person on the deed and can avoid sending it to an estate or holding the funds in escrow.
CAUTION in the event of a dispute
If you are notified of any dispute between people claiming to be heirs of the deceased, the first thing you should do is call your attorney. He or she may advise that the money should be kept in escrow, as probate battles sometimes do occur, and you would not want to be in a position in which you disbursed to the wrong party and possibly have to disburse again, this time out of your own pocket to the correct party, leaving you only with the alternative to sue a party who is most likely out of state. If in doubt, don’t disburse, BUT if there are conflicting demands, we recommend you notify FREC and get guidance. Although notifying FREC is not always desired, your license is crucial, and sometimes a slip up ends up being classified as “failure to account and deliver”, which looks far worse that it may be in reality, but has penalties that can be severe.
(Back to Top)
The Missing Lease
by Michael Geo. F. Davis, Attorney at Law
Missing leases are a fact of life, whether through negligence or theft. Whenever a business deals in as much paperwork as the apartment or home rental business does, misfiled, mislabeled or mistakenly destroyed paperwork, including leases, are bound to happen. Not to mention that the lease, and often the entire file, are taken by an employee for his benefit or the benefit of a friend. How do you deal with these situations? For purposes of this article I will assume that the tenant’s rent is due on the first of the month.
While there may be evidence that a lease once existed - applications, signed addendums, move-in inventory, your computer entries – none of it is conclusive. The burden of proof in court is on you, because you are claiming that the lease once existed and what the lease terms were. The tenant can dispute that he ever signed the lease. He can claim that, despite your company policy against changing the preprinted form, his particular leasing agent agreed to changes. It is an uphill battle, and you are better advised to accept that there is no lease than try to prove one existed.
The simple answer in the eviction case is that the tenant is month-to-month, but this may not really be an accurate assessment, particularly since oral leases of up to a year can be enforceable. If you are sure that a written lease did exist, and you know the duration of the lease, the attorney can allege in the eviction complaint that the lease is lost, and what the rent amount was under that lease. The monthly rent will typically be the amount that that tenant has been paying and which you have been accepting. It is important that you tell your attorney that this is a lost lease case.
Non-eviction missing leases
Often you will discover a missing lease during your own examination of the files. You will have to investigate carefully whether it appears that the lost lease has already expired, at which point the tenancy has become month to month. Florida Statutes require that the tenant give fifteen days notice before the end of a monthly payment period in order to terminate a month-to-month tenancy. When you cannot produce the lease, and the tenant attempts to non-renew during the apparent lease period, we would recommend not challenging the tenant’s non-renewal notice in most cases, unless you have clear evidence of theft. Accordingly, the tenant should not be charged any rent beyond the non-renewal date. The tenant can be charged for damages in excess of ordinary wear and tear. The security deposit claim and return procedure 15-day (deposit returned in full) or 30-day (claim against deposit) clock starts when the apartment is vacated at the end of the month.
An operations decision
The tenant may have his copy of the signed lease. Since you want the tenant on a lease but your occupancy doesn’t afford you the luxury of losing a tenant, you have to make an operational decision to tip your hand or not. If you do nothing, the best case scenario is that the tenant performs as required under the written contract and pays rent until the end of the lease term. If a skip occurs, your ability to charge rent beyond the month the tenant vacated early will be seriously compromised.
A lease is a must
If you want a lease signed, see the tenant in person. Nothing replaces face-to-face contact in assessing the tenant’s intentions. If he decides to stay but is reluctant to re-sign the old lease or sign a new lease, we don’t recommend trying to force the issue by sending a notice of non-renewal or a notice increasing the monthly rent, unless you are very confident that the missing lease has already expired.
A missing lease discovered during an audit can be critical in the low income tax credit property. As a rule a lease is always required. You can attempt to address this missing lease with a Seven Day Notice of Noncompliance with Opportunity to Cure, requesting that the tenant produce his copy of the lease or re-sign the old lease. If the time period runs, I suggest a second Seven Day Cure. If the second time period runs, then you can send a Seven Day Termination notice, but a judge may be unsympathetic to the management office’s perceived incompetence, and without a signed lease showing the tenant’s agreement to comply with LIHTC regulations, the eviction could fail for that reason.
Month to month fees
When you cannot produce a lease, late charges should not be assessed on a Three Day Notice, and your ability to enforce other terms and conditions can also be seriously compromised, such as repayment of concessions, or clauses addressing unauthorized pets or unauthorized occupants. If the lease is missing but one or more addendums is intact, the value of these addendums may be seriously diminished, but they may help in proving the intended duration of the tenancy. We still recommend that the landlord adhere to the obligations created under the standard written lease, such as providing 30 or 60 days’ notice of non-renewal prior to the suspected lease expiration date.
I’ll close with one last word on re-signing. A lease is a form of a contract. There is no requirement that a lease can only be signed at the beginning of the term. It is permissible for you and the tenant to reprint and re-sign his old lease and date your signatures with the current date. This may be particularly helpful when the tenant won’t sign a new replacement lease for an increased lease term.
(Back to Top)