Question: I own a rental condo and have a tenant who two months ago was very late in payment of the rent and last month the rent check bounced due to a banking error, substantiated by a letter from his bank. My question is what can I charge back to the tenant? I know I can charge for the returned rent check; however, there are other charges and expenses incurred by me. These include the fees I had to pay to my mortgage company for sending them a bad check and overdrafts for other payments that I made expecting timely and funded rent checks from my tenant. Can’t I charge those back to the tenant?
Tenants’ attorney Kellman replies:
Your tenant, like any other, may be evicted for nonpayment of the rent. Payment with a check that is not honored by the bank is the same as nonpayment. In your case, the returned check was caused by the bank’s error and not because there were insufficient funds to cover the check. Your tenant, however, is responsible to you for the nonpayment situation regardless of any bank fault. If your lease states a fixed charge for a returned check, it is unlikely that you could receive any other compensation for the losses you incurred as a result of that check other than that returned-check charge. The tenant who may be evicted or charged for the returned check may have recourse against the bank since the bank is responsible to its depositor for the error. Based on the admitted bank error, your tenant may be able to get compensation from the bank if he/she gets evicted due to that error.
Landlords’ attorney Smith replies:
Your tenant’s returned check placed him in violation of your lease agreement. Although a banking error, he cannot shift responsibility to the bank. Generally speaking, recoverable costs from the bounced check are defined in the lease agreement. Most standard leases provide for a returned check charge to be paid by the tenant. The tenant’s failure to pay these charges could result in legal proceedings – including eviction. Enforcement of these costs could be achieved by a proper legal notice concerning the nonpayment.
Property Manager Griswold replies:
Clearly, the tenant’s failure to pay his/her rent in a timely manner with good funds can have a negative impact on your ability to meet your own obligations. Unfortunately, the actual out-of-pocket increased costs incurred by you as a result of the tenant’s breach are your responsibility. However, when you do receive a returned check, you should be sure that you charge the returned-check fee plus an appropriate and legally enforceable late charge since you did not receive the use of the funds. The returned-check fee covers your costs from your bank for the returned check, while your late fee covers the loss of the use of the money. This is a way to help offset the costs you incur with your own returned checks or late payments or to cover some of your costs of having to make these payments from other funds. For example, you might have to pay a penalty to withdraw funds from your savings account.
However, I think there is an important lesson here for rental property owners. I always caution rental property owners in my book, “Real Estate Investing for Dummies,” to have cash reserves so they can meet their financial obligations. Many real estate investment gurus act as if rental income is virtually guaranteed, and they tell real estate investors to use estimates of future income and expenses with only a 5 percent annual vacancy factor. For owners of single-family or condo rental units, I advise using 11 months of income per year as a realistic measure of anticipated income even in the best rental markets. This equates to an 8.33 percent vacancy factor and further adjustments should be made for the potential loss of income due to collection problems. You should always have a reserve of at least three months of expenses, especially for your debt service, property taxes and insurance. You may be able to delay making some of your other payments, but you must pay the lender, the tax collector and you should always have insurance. This way you can avoid losing your property if your tenant were to have serious financial problems and string you out by using the bankruptcy laws or other ways to stay in possession of your property and avoid paying the rent. After you have built up a portfolio of rental properties to diversify your risk, you can then have cash reserves that will essentially cover multiple properties since it is highly unlikely that you will have more than one of your tenants experiencing financial trouble at the same time.
This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of “Property Management for Dummies” and co-author of “Real Estate Investing for Dummies,” and San Diego attorneys Steven R. Kellman, director of the Tenant’s Legal Center, and Ted Smith, principal in a firm representing landlords.
E-mail your questions to Rental Q&A at rgriswold.inman@retodayradio.com.
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