Everything You Wanted To Know About Leases – Part 2
Home / Everything You Wanted To Know About Leases – Part 2
The importance of having a good lease cannot be overstated. This month’s article is Part II in our ongoing series about leases. Based on our significant and ongoing lease related work, we want to share with all of our clients and readers the countless lease concepts and issues that we frequently discuss with clients. These issues cover a wide range of topics from policy decisions, to drafting philosophies, to specific lease language. Because of the breadth of leasing related issues, we will continue to write on this topic in future newsletters, and then compile the entire series for our clients.
Given the current high and increasingly rising cost of utilities, utilities are an important lease issue. The days of utility costs being built into the rent are long gone. A good lease addresses a variety of key utility issues. The lease should clearly indicate whether the tenant or the landlord is responsible for paying utilities. The tenant should always be responsible for paying all utilities not specifically agreed to be paid by the landlord. Many utilities are individually sub-metered. The utility provider almost always bills sub-metered utilities directly. For example, Xcel Energy directly bills users for electricity when sub-metered. Xcel bills the responsible person. The responsible person is the person in Xcel’s records.
For a tenant to be the responsible person in Xcel’s records, the tenant must transfer the electricity into the tenant’s name. Many (if not all) utility providers impose transfer fees. A good lease requires the tenant to transfer all applicable utilities into the tenant’s name and makes the tenant responsible for paying all associated utility transfer costs. Many tenants will fail (either through neglect or intentionally) to timely transfer utilities into the tenant’s name. When the tenant fails to transfer utilities, the utilities remain in the name of the landlord. Your lease should address a tenant’s failure to timely transfer utilities. Since you remain liable for paying utilities not transferred, your lease should not only give you the right to bill the tenant for such costs, but also impose a reasonable charge for the time and effort you know have to spend administering any utility that the tenant should be paying directly to the utility provider.
Some tenants will try to avoid utility bills near the end of their leases, or if they are going to be gone from the premises for a prolonged period of time. Your lease should prevent changes out of the tenant’s name for any reason, including for non-payment. Of course the tenant is not going to tell you when a utility has been or is about to be disconnected. Your lease should address this issue by having the tenant consent to any utility company notifying you of any pending disconnection. If you are not notified of a pending disconnection, the consequences can be severe. For example, you want to be notified that the tenant’s heat is about to be shut off during the middle of winter to avoid the damage caused by freezing pipes. Obviously, if a tenant skips out and breaches the lease, the tenant is not going to pay utilities. Your lease can address this issue by making the tenant liable for utilities until the tenant vacates or could have vacated without breaching the lease.
Many utilities are not sub-metered. These utilities have to be allocated to the tenants in order to be recovered. There are multiple ways to allocate utilities. Utilities can be allocated by number of occupants per unit, square footage, flat fee per unit, and in many other ways and combinations. Landlords are in business to make money. Thus, utility allocation methods are frequently refined and changed to recoup every cent that a property spends on utilities. However, you cannot allocate utilities in a way that results in a profit. In other words, the sum of what each individual tenant pays cannot exceed the total bill from the utility provider. If it does, you are now a for-profit utility provider and are in violation of state law. You are allowed to charge a reasonable administrative fee for costs associated with administrating, allocating, and billing utilities.
The biggest problem we see with utility allocations is the inability to change an allocation method during a lease term. An owner or landlord frequently wants to change a utility allocation (billing) method. However, without proper lease language, you can’t just give your tenants notice that you are changing a utility allocation method. Accordingly, a good lease allows you to change allocation or billing methods on thirty day written notice. Leases commonly fail to specifically set forth allocation methods. Aurora has a city ordinance that requires allocation methods to be set forth in sufficient detail to be understood. We see this as a coming trend. Sufficient description of utility allocation methods is best addressed in a Utility and Services Addendum. A solid Utility and Services Addendum adequately sets forth allocation methods, but also provides flexibility to allocate and bill additional services that the community is providing.
In a perfect world, every tenant always pays, and pays on time. Unfortunately, the world isn’t perfect, and most landlords unfortunately incur costs with non-paying tenants. To the greatest extent possible, non-payment related costs should be passed onto the non-paying tenants. Under Colorado law, you may impose a late fee if rent is not timely paid. Some leases impose a late fee on the 4th (not paid by midnight on the 3rd), and some leases impose a late fee on the 6th (not paid by midnight on the 5th). Imposing a late fee on the 4th is vastly superior because time is money, and a couple of days can make a huge difference in whether you get a non-paying tenant out in the same month. You don’t want a non-paying tenant costing you two months rent instead of one. To a great extent, the monthly rent cycle and the defaulting tenant cycle is the same for everyone. Rent is due, tenant defaults, tenant gets posted, tenant gets evicted, and the sheriff gets scheduled to remove the non-paying tenant. The key to getting any tenant out in the same month or at least as quick as possible is to be at the front of the sheriff’s line. If rent is late on the 4th versus late on the 6th, you have a much greater chance of beating the logjam at the sheriff.
Because many states have maximum late fees, we are often asked if Colorado has a maximum late fee. Colorado law does not set a maximum late fee that can be imposed when a tenant pays rent late. We frequently see $50 and $75 initial late fees, with $5 or $10 per day until paid. The tenant lobby (yes, there is a tenant lobby) has for years tried to get legislation passed to cap late fees. With the current situation at the capitol, we would not be surprised to see some legislation regarding late fees next year. Until then, you should know that at least some judges have started to balk at $75 initial late fees, especially when they are coupled with a $10 per day until paid language.
A good lease will also limit daily late charges to the number of days in a given month that that rent is late. For example, your lease language should state that the Owner agrees that the $10 per day late charge will not exceed the number of actual days in a given month that the amount of rent has not been paid. Even though Colorado law does not set a maximum late fee, courts have analyzed late fees in terms of interest rates. In Colorado, pursuant to the Colorado usury statute, the maximum interest rate is forty-five percent per annum. Thus, if your late fees are more than forty-five percent of the monthly rent, you are vulnerable to the argument that your late fees are usurious.
Your lease should address all other costs that you incur when a tenant doesn’t pay. Most all leases have fees for NSF (bounced) checks. The problem is that we often see excessive NSF charges. In Colorado, the maximum charge of a NSF check is $20, or actual damages as determined by the Uniform Commercial Code. Because actual damages other than bank charges imposed would be difficult to establish, any NSF fee contained in a lease the exceeds the amount charged by landlord’s bank arguably exceeds the NSF statutory limit. Thus, if you bank at Wells Fargo and your lease charges more than the $25 charged by Wells Fargo, a strong argument could be made that your lease does not comply with Colorado law. Nobody wants one hot check replaced by another. A good lease should make the resident replace any NSF check with certified funds.
If tenants do not pay or pay on time, you must post rent demands. Preparing and serving eviction related notices, and having to follow through with an eviction costs time and money. A good lease allows a landlord to recover all eviction related costs starting with posting costs. For example, your lease should contain language that if you have to serve the tenant with any notice because of the tenant’s default, then the tenant agrees to pay a posting fee. We recommend that posting fees do not exceed twenty-five dollars.
In addition to posting fees, a good lease will also allow you to recover all other additional eviction related costs. Obviously, these costs include attorneys’ fees and court costs incurred for having to evict a tenant. But these costs also include lost time spent dealing with and accounting for defaulting tenants. You can recover above and beyond the attorneys’ fees and court costs paid to us for evicting a tenant, but only if it is in your lease. We recommend language such as “tenant shall pay Owner $X for eviction administrative and attorneys’ fees and court costs. The eviction administrative fee is not a late fee or penalty but rather is an addition to any other charges set forth in this Agreement.” Since sheriff’s fees are a major part of eviction related costs, your lease should make tenants responsible for paying them.
We have previously discussed the theft of payments from drop boxes problem, this month we will conclude by discussing potential issues with electronic payments. Electronic payments or electronic fund transfers (EFTs) are quick, convenient, and reliable. With technological advancements, EFTs have become commonplace in the rental industry. The problem with EFTs is that frequently the impact of EFTs on the eviction process has not been given sufficient thought and thus not adequately addressed with appropriate lease language. Specifically, EFT related lease language must address two realities of Colorado law. First, under Colorado law, if a tenant doesn’t pay rent, you have to post them, and you have to accept the money if paid within three days. Second, if you start an eviction and then accept money, you have waived your right to proceed on that eviction. You have to start over by reposting for any unpaid or remaining balance.
When dealing with EFTs, the only ideal solution is to shut off the system. Shutting off the system means the tenant can no longer pay electronically, once rent demands are posted. You want to shut off the system once rent demands are posted and not when they expire to prevent partial payments. This is the only way to guarantee that a tenant does not either make a partial payment during the demand period, slip in a partial payment when you’re ten days down the road into an eviction, or pay in full during the eviction process, when you just want the tenant out. Unfortunately, many clients simply don’t have the ability to turn their rent portal off or prevent tenants from paying electronically.
If you don’t have the ability to shut off electronic payments, then your lease at least needs to prevent tenants from paying electronically once rent is late (any electronic payment made after the late fee date is a breach of the lease). Of course, tenants are going to ignore you and pay electronically after they get posted. Thus, your lease has to address this scenario as well. Some sample language follows. “Owner may return electronic payments made in breach of this Agreement if any payment is made after a demand has expired or if any payment made during the demand period is less than the full demand. Owner shall return any electronic payments within a commercially reasonable time from the time Resident gives written notice of the electronic payment made in response to an eviction demand, and Resident has personally delivered such notice to the onsite leasing office such notice.”
This lease language is designed to address partial payments from being slipped in electronically. The language also protects you against accidentally accepting full rent when you just want a tenant out. Everyone knows that the easiest way to get rid of problem tenant is to evict him for non-payment of rent. You do not want to mistakenly or unknowingly accept the problem tenant’s rent because he slips it in electronically. We regularly see problems with tenants slipping in EFT payments. These payments are often discovered after the eviction is rolling, thus blowing-up the case, and forcing the client to start over. The worst case scenario would be an electronic payment that slides in, nobody notices, eviction proceeds, tenant is out of town, eviction goes through, tenant is moved out, and then returns and files a wrongful eviction.
Requiring the tenant to give you personal notice of electronic payments, when made in breach of the lease is critical. Otherwise, the tenant is just going to fire off an email, which may also be overlooked, resulting in the same problem. EFTs made in breach of the lease should be flagged to your attention, and in a timely manner. Regardless of what the lease says or what a tenant does, if too much time goes by between payment and rejection, the court is going to hold that you accepted a payment by holding onto it for too long. For these reasons, you must also have in place procedures for timely returning EFTs that you do not wish to accept, and being able to prove in court that you returned or rejected the EFT.