Include Key Elements to Ensure Effective Nonpayment Settlements
An owner seeking to evict a resident can’t begin an eviction lawsuit without first legally terminating the tenancy. This means giving the resident written notice, as specified in the state’s termination statute. If the tenant doesn’t move or fix the issue, for example, by paying the rent or finding a new home for an unauthorized occupant, you can then file a lawsuit to evict. State laws set out very detailed requirements to end a tenancy.
But before you get to court or before a judgment is issued, you may have reached a settlement agreement (often called a “stipulation”) with the resident. You may have agreed to allow the resident to stay in the unit in exchange for some promise on the part of the resident. Saving of time and money may have motivated you to settle out of court rather than to go through a trial.
You may settle your case at any time during an eviction before a judge makes a final decision after the hearing. When you settle an eviction case involving nonpayment of rent, you and your resident must sign an agreement that is reviewed and approved by the court. In a typical agreement, the resident agrees to pay back rent and charges according to a set payment schedule.
Problems may arise in the future because a settlement agreement may be poorly written. It’s easy for owners, managers, and attorneys to overlook key points that could prove useful later on. Here are five items you can use to better protect your settlement. And, for each of them, we will give you Model Language that you can adapt and use in your own agreements. Be sure to show our Model Language to an attorney in your area before using it in your agreements.
Description of Amounts Owed
Have the resident admit the total amount owed, the months for which it is owed, and the amount of rent owed for each month. If you settle before your eviction case has gone very far, you don’t want to give the resident leeway to later challenge whether he or she owed anything at all. And a detailed description of the amount(s) the resident owes you helps to clarify the total amount that he or she is agreeing to pay.
If, for example, a resident of ABC Apartments owes rent of $200 per month and late fees for May, June, and July of 2016, the agreement should say:
Resident admits owing to ABC Apartments, Inc., the sum of $645, including unpaid rent for May 2016, June 2016, and July 2016 at the rate of $200 per month, plus late fees at the rate of $15 per month.
Depending on the law in your area, your claim in a nonpayment case may be limited to rent only. However, despite this constraint, parties can agree that charges due under a lease, such as late fees, are to be paid by the resident in return for avoiding a trial. In addition, under rent restrictions outlined in IRC §42(g)(2), fees for late payment of rent, if stated in the lease, is a penalty for failure to perform according to the lease agreement and, therefore, the fee is allowed because it is not included in the rent.
Method of Payment
Repayment schedules usually list the amount of each payment the resident must make and the date by which each payment must be made. But if the resident has bounced any rent checks in the past, you should specify how the resident must make the payments. Rather than worry about whether checks will bounce in the future, have the resident pay in cash or by certified check or money order.
Suppose the resident must repay $215 per month for the next three months. Here is how you might word the repayment schedule.
Resident will make a payment of $215, by certified check, bank check, or money order, on or before Sept. 1, 2016. Resident will make a second payment of $215, by certified check or money order, on or before Oct. 1, 2016. Resident will make a third payment of $215, by certified check or money order, on or before Nov. 1, 2016.
Application of Payments
Describe the way residents’ payments will be applied to current and past-due rents. State that payments will first be applied to the current month’s rent, then to the back rent still owed. This keeps you from ending up back at square one. Applying payments in this way prevents the resident from paying you only for past-due rent and then arguing that you are no longer entitled to claim the full benefit of the settlement agreement, because it concerns debts he or she no longer owes you.
Example: A resident owes total back rent of $645 for the months of May, June, and July 2016 ($200 rent, plus a $15 late fee per month). The resident agrees to repay $215 per month for each of the next three months, but the settlement agreement does not explain how the payments will be applied. In September 2016, the resident should pay you $415—the combined amount of the current rent payment and the scheduled payment of past-due rent and late fee.
Instead, the resident pays $215. If the resident continues doing this for three months and you then return to court, the resident may be able to convince the court that you must file an entirely new eviction case. To avoid this situation, your agreement should say:
All payments received will be applied to current rent first and then to past-due rent and charges.
Sometimes, as a defense, residents raise the argument that they didn’t pay rent because you didn’t maintain the unit. This may result in a settlement agreement in which the resident agrees to pay back rent, but you also agree to perform the repairs that the resident claims are needed.
In these cases, it’s important to include in your agreement a detailed description of the repairs you are responsible for. If the description is too vague, you give the resident an excuse for not following the repayment schedule—namely, that you never did the repairs.
If you are aware of all the needed repairs, be as specific as possible about them in the settlement agreement. For example, suppose the resident claims that the front-door lock is broken. Don’t state “Management will correct problems with the front door to the unit.” Instead, your agreement should say: “Management will replace the front-door lock.”
Spell out what will happen if the resident defaults or does not comply with the repayment schedule. Get your attorney’s advice on your legal rights if this occurs. Describing these rights in a default clause discourages the resident from viewing the settlement agreement as an easy way to avoid eviction.
What your default clause should say depends on whether your state’s law allows for the award of money judgments and/or warrants based on residents’ breach of eviction settlement agreements. If your state’s law gives you these rights, you should add the following language to the agreement:
In the event of a default on any payment, the Manager shall have the immediate right to a money judgment against Resident for the remaining amount due under this agreement, and for a judgment of possession and an eviction warrant, upon an affidavit of the Manager setting forth the default.
If your state law does not permit you to obtain an immediate order or judgment of any kind, you should still include a default clause that explains your right to continue with the eviction case, such as the following:
In the event of a default on any payment, the Manager shall have the right to seek the entry of a final judgment of possession and a money judgment for the remaining amount due under this agreement, and to seek a warrant of eviction.
Other Points in Your Settlement Agreement
Make sure your settlement agreement does not establish a new tenancy. By signing a nonpayment agreement, the resident should not only acknowledge his obligations under the agreement but also agree to recognize all of his old obligations under the lease. State in the nonpayment settlement that “prior obligations under the lease are incorporated in the agreement and no new tenancy is established voiding those obligations.”
Also make sure the settlement agreement stipulates its duration. After the final payment under the settlement, a chronic late payer may pay late again. To avoid going back to court, you might state that the nonpayment agreement “shall remain in effect for one year from the date on which it is signed, or whenever the outstanding arrearage is paid in full, whichever is later.”