LATE CHARGE AND UTILITY CHARGE ACCUMULATIONS
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 residents 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 resident 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 resident 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 resident’s ledger is a complete mess and nearly impossible to distinguish. When the next month comes along the resident 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 resident 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 resident 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 resident intended for rent to be paid. We recommend that unless the resident has been given a receipt and a balance due statement each time a partial payment was accepted, if the rent is $700 and the resident pays $700, it should be assumed that the resident is paying base rent. Getting a resident in line is a process that cannot be accomplished overnight and should not be attempted through the eviction process unless all else has failed.
- Notify the resident in writing that NO partial payments will be accepted in the future. Explain that the payment the resident makes must include any utilities for the period used and any late charges for that period.
- 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 resident owes on the Three Day Notice if it is a large accumulation of late charges and utility bills.
- 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 resident 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?
- The resident may attempt to pay the base rent as before. We feel this should be refused and returned to the resident. Accepting this amount does absolutely nothing to solve your problem.
- The resident 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 resident 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 resident 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 resident using the Past Due Amounts Workout Agreement.
- The resident 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 resident to come up with a plan to pay the past due monies owed in a fashion that hopefully the resident 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 resident 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 resident 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 resident an accounting showing exactly how the monies the resident paid were applied. If they are applied to utilities and late charges first, make this perfectly clear, as the resident 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 resident 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
- The Curable Noncompliance Examined PART 1
- THE CURABLE NONCOMPLIANCE EXAMINED PART 2
- THE WRIT OF POSSESSION – WHAT IT IS
- THE WRIT OF POSSESSION AND THE FULL UNIT
- WORK ORDER COMPANY POLICY AND THE LAW