Tuesday, June 7, 2011


How Recapture Works

It was a common stick and carrot method of encouraging compliance with your rules and it was included in very many leases. You give the tenant more favorable terms, such as reduced rent, if they follow the rules and pay on time. If the tenant at some point stops following the rules or paying on time you are entitled to reimbursement for all or a portion of the reduced rent returned to you. It is nice getting $25 taken off your rent each month, but it is very painful having to repay 10 months of the $25 concession at once.

This worked very well, for a while.

What Happened?

The State of North Carolina stepped in and once again inserted itself where it did not belong, in the landlord-tenant relationship. N.C. Gen Stat. 42-46 was passed setting maximum allowable fees by landlords. N.C. Gen. Stat. 42-46 provides:

(a) In all residential rental agreements in which a definite time for the payment of the rent is fixed, the parties may agree to a late fee not inconsistent with the provisions of this subsection, to be chargeable only if any rental payment is five days or more late. If the rent:

(1) Is due in monthly installments, a landlord may charge a late fee not to exceed fifteen dollars ($15.00) or five percent (5%) of the monthly rent, whichever is greater.

(2) Is due in weekly installments, a landlord may charge a late fee not to exceed four dollars ($4.00) or five percent (5%) of the weekly rent, whichever is greater.

You are probably wondering what this has to do with recapturing rent concessions.

Unfortunately the answer could be - everything. Due to the amounts in question there is not much case law interpreting North Carolina landlord tenant statutes. This means much of landlord tenant law in North Carolina is a role of the dice. There is currently a class action suit pending in Wake County asserting that recapture is a form of late fee and should be subject to the 5%/$15 set out above.

As you know, news tends to travel among tenants, and as soon as one brings a suit challenging this provision they will get others to join.

But wait, there's more.

It starts with Friday.

I usually like Fridays too but not in this case. In 2003 we learned from the North Carolina Court of Appeals that a "Landlord constituted a “debt collector,” as defined in the North Carolina Debt Collection Act (NCDCA), where landlord sought to recover past due rent and related charges", in Friday v. Union Dominion Realty Trust, Inc., 155 N.C.App. 671, 575 S.E.2d 532 (NC App. 2003). In Friday, the Court went on to hold that a violation of North Carolina's late fee law (NCGS 42-46) was also a violation of the Unfair and Deceptive Trade Practices Act (UDTPA). This is bad news because violations of the UDTPA allow a court to award treble damages and the tenant's attorneys fees. Therefore, if recapture of previous rent concessions violates the late fee statute it is also probably violates the UDTPA.

So, if you could be subjecting yourself to treble damages and having to pay the tenant's attorney's fees, are those recapture provisions really worth it? You would probably be better advised to cancel a concession rate (i.e. the rent increases from $800 to market rate of $875 after the violation) rather than attempting to recapture previous months preferential rate difference.

The court has not yet ruled on the Wake County class action, and if it is like most cases, it may not get to because the case will settle. However, it is likely that Legal Services is aware of this case as are other tenant's attorneys, so this issue will probably come up again.

1 comment:

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