Friday, May 6, 2011

CAN A RESIDENTIAL LANDLORD ENFORCE AN ACCELERATION CLAUSE IN THEIR LEASE?

I recently had an out of state owner of North Carolina rental property retain me to answer this question, which would seem to be a fair question. Mortgages have accelerations clauses as do many other loans, why not a residential lease.

I will start out by answering the first question some of you may have, namely “what is an acceleration clause?” An acceleration clause in this instance is a lease provision that would accelerate all the rent due over the term of the lease to be due immediately upon a breach of the lease.

There is no statutory law “on point” regarding acceleration clauses in residential leases. It is not specifically mentioned in Chapter 42 (the Landlord/Tenant Statutes) or in Chapter 75 (Unfair and Deceptive Trade Practices Statues). So we need to look a little deeper. Essentially, the acceleration clause frees a landlord from his duty to mitigate (or reduce) his damages and accelerates the collection process. The law in North Carolina is that the non-breaching party to a residential lease contract has a duty to mitigate his damages upon breach of such contract. Allowing a landlord to accelerate the rent due upon the tenant’s breach would release the landlord from this duty to mitigate. The North Carolina Court of Appeals has held that it is lawful for a commercial landlord to negotiate a lease that negates his duty to mitigate. The Court made clear that it found these contract provisions enforceable because they believe commercial parties to be of equal bargaining power. The Court specifically stated that this reasoning did not extend to “such a clause in a residential lease, which presents an entirely different situation.”

The court would likely find an acceleration clause in a residential contract to be unenforceable as a violation of public policy. The North Carolina courts and legislature take a much more “paternalistic” approach to residential tenants, because they believe that residential tenants are in a signif icantly weaker bargaining position relative to property owners. This is likely because neither the judges nor the legislators have been residential tenants for quite some time. As an example, the Court of Appeals found a landlord who attempted to collect fees that he was not owed (a late fee that was $1 in excess of the 5% statutory late fee cap) violated both the state’s Unfair & Deceptive Trade Practices Act and the North Carolina Debt Collectors Act. Violations of these acts may result in an award to the tenant of treble damages or a $2,000.00 fine, and attorneys’ fees. Further, if the court finds that in applying an acceleration clause a landlord has wrongfully withheld a security deposit, the tenant may be awarded attorneys’ fees.

Rather than attempting to enforce an acceleration clause, it is a much better policy to obtain the maximum security deposit, use a good lease that provides for all the fees to a tenant allowed by North Carolina tenancy law, and not hesitate to file a legal action to enforce the lease immediately upon default.

4 comments:

  1. I will keep your new article. I really enjoyed reading this post, thanks for sharing.

    Sol
    www.gofastek.com

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  3. An acceleration clause in a residential contract is unenforceable as a violation of public policy and it is there in law. It's quite reasonable how you have placed the logic. There too some property management law exists and one needs to get through it before approaching. I guess one can find better solution to it by visiting a good property management farm. Property Management Firm High Point, NC.

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