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.
Showing posts with label Tenant Security Deposit Act. Show all posts
Showing posts with label Tenant Security Deposit Act. Show all posts
Friday, May 6, 2011
Sunday, January 9, 2011
What Can You do When Your Tenant Moves Out and Trashes the Unit?
Recently I had a landlord ask me: My tenants told us they were moving out by text message because they could not pay the rent. I was unable to inspect the unit until they left. When I got there the residence was empty, except for piles of garbage bags in the garage. In the spare bedroom I found massive damage to the ceiling, walls and floor. They ripped the carpet out and did an amazing amount of damage to the room. I want to sue the tenants and press criminal charges but I do not understand how to get started in the right direction.
The landlord's question touches on three areas: 1) security deposit; 2) civil suit; and 3) criminal prosecution.
Security Deposit Issues
For starters, hopefully you had a security deposit to at least partially compensate you for the damage. If you had a security deposit you must send an accounting of how the security deposit was applied to the damages within 30 days, if you can figure out the amount of damages within 30 days. If you don't know the total cost of the damages within 30 days, you need to send an interim accounting of how the deposit was applied within 30 and then a final accounting within sixty days. The North Carolina Security Deposit Act can be found at N.C.G.S. 42-50.
Civil Suit
As for a civil suit, the first question is whether you can locate the tenants. If you can, or you hire someone who can, then you may file an action either in small claims court (if under $5k damages); district court (if under $10k damages), or Superior Court (if over $30k in damages). Whether you will need an attorney will depend on the amount of damages, how the property is owned (in your own name or under some sort of business entity), and your level of comfort going to court. Additionally, just because you win and get a judgment against the tenants does not mean that you will be able to collect on the judgment, so you will need to decide whether it is worth the expense of hiring an attorney, or even filing a complaint.
If you file in small claims without an attorney the court clerk's office has forms you can fill out that are fairly simple. If you have any questions the clerk's offices are often very helpful. You will want to take pictures of the unit as you found it, and keep all your receipts to demonstrate the cost of repairs to the court.
Criminal Prosecution of Tenant for Damages
There is a criminal offense under N.C.G.S. § 42-11 entitled "willful destruction by tenant misdemeanor," which makes it a Class 1 Misdemeanor to willfully damage a rental dwelling. You may wish to speak to the sheriff's department or local police about charging the tenant with this offense. You should be prepared for law enforcement not to want to get involved in what they may view as a civil dispute.
What should the landlord have done before he got himself in this position?
Two things come immediately to mind.
1) Regular visits to the rental unit. Make sure your lease provides you the opportunity to drop by the unit from time to time to inspect, and take advantage of this opportunity.
2) Qualify the tenant. Make sure the tenant has a decent credit rating, job and good references.
As a landlord you have to be vigilant. Absentee landlords often end up having their profits absent as well. Good luck and Happy Landlording!
The landlord's question touches on three areas: 1) security deposit; 2) civil suit; and 3) criminal prosecution.
Security Deposit Issues
For starters, hopefully you had a security deposit to at least partially compensate you for the damage. If you had a security deposit you must send an accounting of how the security deposit was applied to the damages within 30 days, if you can figure out the amount of damages within 30 days. If you don't know the total cost of the damages within 30 days, you need to send an interim accounting of how the deposit was applied within 30 and then a final accounting within sixty days. The North Carolina Security Deposit Act can be found at N.C.G.S. 42-50.
Civil Suit
As for a civil suit, the first question is whether you can locate the tenants. If you can, or you hire someone who can, then you may file an action either in small claims court (if under $5k damages); district court (if under $10k damages), or Superior Court (if over $30k in damages). Whether you will need an attorney will depend on the amount of damages, how the property is owned (in your own name or under some sort of business entity), and your level of comfort going to court. Additionally, just because you win and get a judgment against the tenants does not mean that you will be able to collect on the judgment, so you will need to decide whether it is worth the expense of hiring an attorney, or even filing a complaint.
If you file in small claims without an attorney the court clerk's office has forms you can fill out that are fairly simple. If you have any questions the clerk's offices are often very helpful. You will want to take pictures of the unit as you found it, and keep all your receipts to demonstrate the cost of repairs to the court.
Criminal Prosecution of Tenant for Damages
There is a criminal offense under N.C.G.S. § 42-11 entitled "willful destruction by tenant misdemeanor," which makes it a Class 1 Misdemeanor to willfully damage a rental dwelling. You may wish to speak to the sheriff's department or local police about charging the tenant with this offense. You should be prepared for law enforcement not to want to get involved in what they may view as a civil dispute.
What should the landlord have done before he got himself in this position?
Two things come immediately to mind.
1) Regular visits to the rental unit. Make sure your lease provides you the opportunity to drop by the unit from time to time to inspect, and take advantage of this opportunity.
2) Qualify the tenant. Make sure the tenant has a decent credit rating, job and good references.
As a landlord you have to be vigilant. Absentee landlords often end up having their profits absent as well. Good luck and Happy Landlording!
Sunday, November 7, 2010
How to Keep From Getting Beat By Your Tenants
As a landlord you can never completely guard yourself against a tenant owing you money, there are simply too many laws in the tenant's favor, however you can take steps to level the playing field.
Tenant Selection
The first step to avoid ending up with a tenant owing you money is to carefully choose that tenant. The single most important tool for finding a responsible tenant is check your prospective tenant's credit score. Job history is good, prior landlords may not be trustworthy, or possibly may not even be prior landlords at all, but credit scores are pretty objective. If you wish to accept a tenant whose score is lower than you would normally accept make sure that you get a co-signer. The better practice is to have objective criteria such as at least a credit score of 660. If you base your decision on who you rent to on objective criteria it will make it much more difficult for anyone to win a fair housing lawsuit against you.
Security Deposit
The next step is to always require the maximum security deposit that the law, and the market, will allow. In North Carolina the maximum security deposit a residential landlord can require is: (a) If the term of the tenancy is week to week, the landlord can require two weeks rent; (b) If the term of the tenancy is month to month, the landlord can require one and one-half month’s rent; or (c) If the term of the tenancy exceeds one month, the landlord can charge two months rent. See N.C.G.S. 42-51.You must require this security to be paid prior to giving your new tenant keys. I have seen kind hearted landlords get beat for unpaid rent many times by tenants who were going to send the security deposit "next week."
A Good Lease
The third step is to make sure you include necessary lease provisions allowing you to bring an eviction action immediately upon a breach of the lease, such as non-payment of rent. Evictions in the best of circumstances take several weeks from when you file. There is no reason to get stuck waiting an extra ten days because you do not have a properly drafted lease.
Lease Enforcement
You did not go through the trouble and expense of getting a good lease just to hide it in a folder. File on you tenant as soon as they are late, and make sure if they are going to stay they reimburse you for your fees and costs surrounding the filing. Also, make sure you require that late fees be paid. Make it in the tenant's best interest that they pay you timely.
The Paperwork
Keep a file on each tenant with their application and require that they update the application when any information changes. Additionally, if your tenant pays by check keep copies of the checks at regular intervals so that you know where your tenant banks. This information will be invaluable if you have to sue your tenant for unpaid rent, and you wish to collect on the judgment.
The Human Touch
Finally, you or your property manager should try to keep on friendly terms with your tenant(s) so that you will know when there are any changes in their lives that might render them unable to pay rent. Problems with tenants are much easier to deal with if you catch them early.
As always, if any of the readers have suggestions I am always open to new ideas. Feel free to comment or send me a personal e-mail.
Happy Landlording!
Tenant Selection
The first step to avoid ending up with a tenant owing you money is to carefully choose that tenant. The single most important tool for finding a responsible tenant is check your prospective tenant's credit score. Job history is good, prior landlords may not be trustworthy, or possibly may not even be prior landlords at all, but credit scores are pretty objective. If you wish to accept a tenant whose score is lower than you would normally accept make sure that you get a co-signer. The better practice is to have objective criteria such as at least a credit score of 660. If you base your decision on who you rent to on objective criteria it will make it much more difficult for anyone to win a fair housing lawsuit against you.
Security Deposit
The next step is to always require the maximum security deposit that the law, and the market, will allow. In North Carolina the maximum security deposit a residential landlord can require is: (a) If the term of the tenancy is week to week, the landlord can require two weeks rent; (b) If the term of the tenancy is month to month, the landlord can require one and one-half month’s rent; or (c) If the term of the tenancy exceeds one month, the landlord can charge two months rent. See N.C.G.S. 42-51.You must require this security to be paid prior to giving your new tenant keys. I have seen kind hearted landlords get beat for unpaid rent many times by tenants who were going to send the security deposit "next week."
A Good Lease
The third step is to make sure you include necessary lease provisions allowing you to bring an eviction action immediately upon a breach of the lease, such as non-payment of rent. Evictions in the best of circumstances take several weeks from when you file. There is no reason to get stuck waiting an extra ten days because you do not have a properly drafted lease.
Lease Enforcement
You did not go through the trouble and expense of getting a good lease just to hide it in a folder. File on you tenant as soon as they are late, and make sure if they are going to stay they reimburse you for your fees and costs surrounding the filing. Also, make sure you require that late fees be paid. Make it in the tenant's best interest that they pay you timely.
The Paperwork
Keep a file on each tenant with their application and require that they update the application when any information changes. Additionally, if your tenant pays by check keep copies of the checks at regular intervals so that you know where your tenant banks. This information will be invaluable if you have to sue your tenant for unpaid rent, and you wish to collect on the judgment.
The Human Touch
Finally, you or your property manager should try to keep on friendly terms with your tenant(s) so that you will know when there are any changes in their lives that might render them unable to pay rent. Problems with tenants are much easier to deal with if you catch them early.
As always, if any of the readers have suggestions I am always open to new ideas. Feel free to comment or send me a personal e-mail.
Happy Landlording!
Tuesday, September 28, 2010
Security Deposits: How Much Can I Require, and What Do I Have to with Them?
Residential security deposit law in North Carolina is governed by the Tenant Security Deposit Act and can be found at N.C.G.S. 42-50 through 42-55. As is often the case in tenancy law, this act primarily addresses issues in residential tenancies so this article will be addressed to residential security deposits.
How much can I charge for the security deposit?
Unfortunately the answer to this question is a moving target. The amount of security deposit depends on the term of the tenancy as follows:
(a) If the term of the tenancy is week to week, the landlord can require two weeks rent;
(b) If the term of the tenancy is month to month, the landlord can require one and one-half month’s rent; or
(c) If the term of the tenancy exceeds one month, the landlord can charge two months rent. See N.C.G.S. 42-51.
Are there additional fees a landlord can charge?
Landlords are also entitled to a non-refundable "pet fee". The only requirement for the "pet fee" is that it must be reasonable, and the tenant must have a pet.
I have the security deposit, now what do I do with it?
A landlord must place the security deposit in a trust account with a licensed and insured bank or savings institution in North Carolina, and notify the tenant of the bank's name and address within 30 days after the beginning of the lease term. There are a couple of minor exceptions to this rule but they involve the landlord obtaining a bond for the amount of the deposit, and will not affect most landlords.
If you know where you will place the security deposit at the time you prepare the lease, it is wise to include this notification in the lease.
If you move the security deposit at any time, you should notify the tenant immediately in writing of the new location.
When must the deposit be returned?
The landlord must return the deposit to the tenant within thirty days after the end of the rental period. If the landlord deducts from the deposit for damage to the property, or for unpaid rent, those charges must be described to the tenant in writing, and the writing (also referred to as an accounting) plus any portion of the deposit still due to the tenant must be delivered within that same thirty-day period.
If the extent of the landlord's claim against the security deposit cannot be determined within 30 days, the landlord shall provide the tenant with an interim accounting no later than 30 days after termination of the tenancy and delivery of possession of the premises to the landlord and shall provide a final accounting within 60 days after termination of the tenancy and delivery of possession of the premises to the landlord.
What deductions can the landlord make from the security deposit?
You may only take deductions from the security deposit for: the tenant's nonpayment of rent and costs for water or sewer services; damage to the premises beyond reasonable wear and tear; nonfulfillment of rental period; any unpaid bills that become a lien against the demised property due to the tenant's occupancy; costs of re-renting the premises after breach by the tenant; costs of removal and storage of tenant's property after a summary ejectment proceeding; or court costs in connection with terminating a tenancy.
Additionally, it should go without saying but, you can only deduct your actual damages, and you should keep receipts to substantiate your deductions in case you are sued by the tenant.
What if I don’t know where to send the security deposit to the tenant after he vacates the property?
If the tenant's address is unknown the landlord shall apply the deposit as permitted after a period of 30 days and the landlord shall hold the balance of the deposit for collection by the tenant for at least six months.
It is a good practice to send the deposit to the tenant via certified mail. If the mail is returned unopened put in the tenant’s file the same way. If you are later sued for failure to return the deposit you will have clear evidence that you attempted to return it.
What if I fail to comply with the act?
If the landlord fails to account for and/or refund the balance of the tenant's security deposit as required by this Article, the tenant may institute a civil action to require the accounting of and the recovery of the balance of the deposit.
The willful failure of a landlord to comply with the deposit, bond, or notice requirements of this Article shall void the landlord's right to retain any portion of the tenant's security deposit as otherwise permitted under G.S. 42-51.
In addition to other remedies, the tenant may recover damages resulting from noncompliance by the landlord; and upon a finding by the court that landlord is in willful noncompliance, the court may award attorney's fees to be taxed as part of the costs of court.
What if I sell or buy a rental property already occupied by tenants?
Within 30 days after the termination of the landlord's interest in the dwelling unit in question, the landlord shall, do one of the following acts:
(1) Transfer the portion of the deposit remaining after any lawful deductions made under this section to the landlord's successor in interest and thereafter notify the tenant by mail of such transfer and of the transferee's name and address; or
(2) Return the portion of the deposit remaining after any lawful deductions to the tenant.
Upon receipt of the deposit the purchaser must place it in a trust account with a licensed and insured bank or savings institution in North Carolina, and notify the tenant of the bank's name and address within 30 days after the beginning of the lease term.
Happy landlording!
How much can I charge for the security deposit?
Unfortunately the answer to this question is a moving target. The amount of security deposit depends on the term of the tenancy as follows:
(a) If the term of the tenancy is week to week, the landlord can require two weeks rent;
(b) If the term of the tenancy is month to month, the landlord can require one and one-half month’s rent; or
(c) If the term of the tenancy exceeds one month, the landlord can charge two months rent. See N.C.G.S. 42-51.
Are there additional fees a landlord can charge?
Landlords are also entitled to a non-refundable "pet fee". The only requirement for the "pet fee" is that it must be reasonable, and the tenant must have a pet.
I have the security deposit, now what do I do with it?
A landlord must place the security deposit in a trust account with a licensed and insured bank or savings institution in North Carolina, and notify the tenant of the bank's name and address within 30 days after the beginning of the lease term. There are a couple of minor exceptions to this rule but they involve the landlord obtaining a bond for the amount of the deposit, and will not affect most landlords.
If you know where you will place the security deposit at the time you prepare the lease, it is wise to include this notification in the lease.
If you move the security deposit at any time, you should notify the tenant immediately in writing of the new location.
When must the deposit be returned?
The landlord must return the deposit to the tenant within thirty days after the end of the rental period. If the landlord deducts from the deposit for damage to the property, or for unpaid rent, those charges must be described to the tenant in writing, and the writing (also referred to as an accounting) plus any portion of the deposit still due to the tenant must be delivered within that same thirty-day period.
If the extent of the landlord's claim against the security deposit cannot be determined within 30 days, the landlord shall provide the tenant with an interim accounting no later than 30 days after termination of the tenancy and delivery of possession of the premises to the landlord and shall provide a final accounting within 60 days after termination of the tenancy and delivery of possession of the premises to the landlord.
What deductions can the landlord make from the security deposit?
You may only take deductions from the security deposit for: the tenant's nonpayment of rent and costs for water or sewer services; damage to the premises beyond reasonable wear and tear; nonfulfillment of rental period; any unpaid bills that become a lien against the demised property due to the tenant's occupancy; costs of re-renting the premises after breach by the tenant; costs of removal and storage of tenant's property after a summary ejectment proceeding; or court costs in connection with terminating a tenancy.
Additionally, it should go without saying but, you can only deduct your actual damages, and you should keep receipts to substantiate your deductions in case you are sued by the tenant.
What if I don’t know where to send the security deposit to the tenant after he vacates the property?
If the tenant's address is unknown the landlord shall apply the deposit as permitted after a period of 30 days and the landlord shall hold the balance of the deposit for collection by the tenant for at least six months.
It is a good practice to send the deposit to the tenant via certified mail. If the mail is returned unopened put in the tenant’s file the same way. If you are later sued for failure to return the deposit you will have clear evidence that you attempted to return it.
What if I fail to comply with the act?
If the landlord fails to account for and/or refund the balance of the tenant's security deposit as required by this Article, the tenant may institute a civil action to require the accounting of and the recovery of the balance of the deposit.
The willful failure of a landlord to comply with the deposit, bond, or notice requirements of this Article shall void the landlord's right to retain any portion of the tenant's security deposit as otherwise permitted under G.S. 42-51.
In addition to other remedies, the tenant may recover damages resulting from noncompliance by the landlord; and upon a finding by the court that landlord is in willful noncompliance, the court may award attorney's fees to be taxed as part of the costs of court.
What if I sell or buy a rental property already occupied by tenants?
Within 30 days after the termination of the landlord's interest in the dwelling unit in question, the landlord shall, do one of the following acts:
(1) Transfer the portion of the deposit remaining after any lawful deductions made under this section to the landlord's successor in interest and thereafter notify the tenant by mail of such transfer and of the transferee's name and address; or
(2) Return the portion of the deposit remaining after any lawful deductions to the tenant.
Upon receipt of the deposit the purchaser must place it in a trust account with a licensed and insured bank or savings institution in North Carolina, and notify the tenant of the bank's name and address within 30 days after the beginning of the lease term.
Happy landlording!
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