Collect Extra Fee for Returned Checks
Every time a resident bounces a check, it drives up your site's costs. The penalty fees charged for depositing bad checks averaged $28.95 last year—an all-time high, according to a survey published by http://Bankrate.com. Add to that staff time spent on collection efforts, the disruption in cash flow, and interest payments, and you can easily see why it's important to ensure that you are reimbursed for insufficient funds fees.
You can charge residents a reasonable fee for returned checks as long as you include a provision in your lease that authorizes the fee, says California attorney Ted Kimball. Failing to do so will make determining your actual losses subject to dispute.
State law determines how much you can charge residents for returned checks. Typically, the fee should be equal to the amount your bank will charge for the bounced check, plus other costs incurred in handling it (for example, administrative and accounting costs). For instance, in California, a site can charge up to $25 for the first bounced check and $35 for each subsequent returned check [Cal. Civ. Code §1719].
Add Fee Language to Lease
Kimball provides the following Model Language that can be added to a lease to obligate residents to pay returned check fees. Before using it, be sure to check with your attorney to make sure the language complies with local laws.
Model Lease Language
Resident agrees to pay a charge of $25 for the first dishonored check and $35 for any subsequent dishonored check. After receiving any dishonored check, Landlord reserves the right to require all further payments to be made by money order, certified check, or cashier's check.
In addition to a returned check fee, some states, like California, also provide the option to sue for additional damages equal to three times the amount of the check if the resident does not make the check good within 30 days. However, Kimball cautions site managers against taking such action unless the resident has already moved out of the unit. Why? Doing so would eliminate your ability to serve notice to pay rent or quit, he says. And if you have a resident who routinely bounces checks or simply has not paid at all, you may decide that it's time to start eviction procedures.
EDITOR'S NOTE: To protect yourself further against bounced checks, consider adding language to the lease, like our Model Lease Language above, that states that residents whose rent checks are returned for insufficient funds must pay by cashier's check or money order in the future.
Don't Inadvertently Waive Right to Collect
Whether it is a returned check fee or late payment fees, if you set a precedent of failing to collect from the resident, it may become difficult for you to enforce those policies in the future, regardless of whether they are included in the lease.
If you fail to collect penalty fees beyond a reasonable time, then the resident can claim that, by your inaction, you have waived your right to pursue it, says Kimball.
In addition to procrastinating in collecting returned check fees, sometimes your statements or conduct can cause a resident to believe that he does not have to pay penalty fees. For instance, let's say that, in the attempt to collect the rent from a resident who bounced a check, a manager tells him not to worry about the fee this time as long as he pays the rent.
Statements like this imply that site management is waiving a known right. From that gesture, the resident may construe that the returned check fee is optional, and that he will not be obligated to pay it in the future if he bounces another check.
“By inaction or by statements that would lead a reasonable person to believe that the owner of the right is not going to exercise it, then you could find yourself in a situation where the debt is not legally owed,” Kimball says.
PRACTICAL POINTER: When a resident's check is returned due to insufficient funds, it's important to inform him immediately. Include in your correspondence the amount of rent owned, plus the additional charge for the returned check, as well as possible late fees if the bounced check causes the resident's rent to become overdue. Give clear instructions for submitting payment (for example, by cash, certified check, or money order), and include a deadline by which you must receive it.
Insider Source
Ted Kimball: Partner, Kimball, Tirey & St. John LLP, San Diego, CA; (800) 338-6039; ted.kimball@kts-law.com; http://www.kts-law.com.
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