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.
Showing posts with label Unfair and Deceptive Trade Practices Act. Show all posts
Showing posts with label Unfair and Deceptive Trade Practices Act. Show all posts
Tuesday, June 7, 2011
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.
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.
Sunday, April 17, 2011
LANDLORDS BEWARE THE NORTH CAROLINA UNFAIR AND DECEPTIVE TRADE PRACTICES ACT!!!
The Unfair and Deceptive Trade Practices Act (UDTPA) as it relates to landlords is one of the biggest areas of potential liability for North Carolina landlords.
What is the Unfair & Deceptive Trade Practices Act?
The Unfair & Deceptive Trade Practices Act is kind of like the legal equivalent of a Swiss Army Knife for going after a business. It can be used for just about anything. The UDTPA declares unlawful “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.”
If we were to break it up it goes kind of like this:
(1) An unfair or deceptive act or practice;
(2) In or affecting commerce; which
(3) Proximately caused actual injury to the claimant or his business
Additionally, if you want to read the actual language of the UDTPA it begins at N.C.G.S. 75-1.
What does this have to do with being a landlord?
Sadly, the answer is plenty. The NC Court of Appeals has held that “Residential rental agreements fall within Chapter 75 because ‘the rental of residential housing is’ considered commerce pursuant to N.C. Gen.Stat. § 75-1.1.” Incidentally, the Act affects commercial landlords too.
Actions or inactions within the landlord-tenant relationship that may violate the UDTPA include:
1. Failing to maintain rental property in a “fully” habitable condition and continuing to demand rent. The North Carolina Appellate Court has held that collecting rent after having knowledge of the uninhabitable nature of part of a rental unit (water leaking in one of the bedrooms and the living room) constituted unfair trade practices and was thus a violation. The actual amount of “uninhabitability” of the premises that will trigger a UDTPA violation will be a fact sensitive question for each individual case;
2. Attempting to force a tenant out without filing for eviction by cutting off water and electricity to the rental unit (this is also a violation of the Ejectment of Residential Tenants Act);
3. Renting a property that you only have an option to purchase; and
4. Attempting to collect money you are not entitled to, or using means prohibited by the North Carolina Debt Collections Act.
Hopefully if you are smart enough to read this article you would not even think of doing anything that would violate numbers 2 and 3 above. These should be big red flags.
With respect to paragraph 4, you need to be familiar with at least the North Carolina Debt Collection Practice Act, N.C.G.S. 42-46 (which regulates the amount of late fees and court appearance fees), and your lease.
Paragraph number 1, regarding habitability issues, is a little more tricky and will require that you are familiar with N.C.G.S. 42-42 (which addresses a landlord’s responsibility to provide fit premises), your lease, any other local, federal, or state regulations that may apply to your rental unit, and most importantly common sense.
What if you didn’t mean to do anything wrong?
Unfortunately, the answer is: Too Bad. The North Carolina courts have held that the intent of the defendant is irrelevant, even if he is acting in good faith.
Ok, so we know what the act is, why is it so scary?
The UDTPA provides for mandatory recovery of treble damages if the court finds a violation of the statute. Additionally, if facts also support recovery for punitive damages, the plaintiff may allege both, but the recovery is limited to one or the other. Further, the court may award reasonable attorney’s fees to the attorney representing the prevailing party when the losing party willfully engaged in the unfair practice, and there was an unwarranted refusal by such party to fully resolve the matter which constitutes the basis of such suit.
If you have any questions or comments feel free to post or send me an e-mail.
What is the Unfair & Deceptive Trade Practices Act?
The Unfair & Deceptive Trade Practices Act is kind of like the legal equivalent of a Swiss Army Knife for going after a business. It can be used for just about anything. The UDTPA declares unlawful “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.”
If we were to break it up it goes kind of like this:
(1) An unfair or deceptive act or practice;
(2) In or affecting commerce; which
(3) Proximately caused actual injury to the claimant or his business
Additionally, if you want to read the actual language of the UDTPA it begins at N.C.G.S. 75-1.
What does this have to do with being a landlord?
Sadly, the answer is plenty. The NC Court of Appeals has held that “Residential rental agreements fall within Chapter 75 because ‘the rental of residential housing is’ considered commerce pursuant to N.C. Gen.Stat. § 75-1.1.” Incidentally, the Act affects commercial landlords too.
Actions or inactions within the landlord-tenant relationship that may violate the UDTPA include:
1. Failing to maintain rental property in a “fully” habitable condition and continuing to demand rent. The North Carolina Appellate Court has held that collecting rent after having knowledge of the uninhabitable nature of part of a rental unit (water leaking in one of the bedrooms and the living room) constituted unfair trade practices and was thus a violation. The actual amount of “uninhabitability” of the premises that will trigger a UDTPA violation will be a fact sensitive question for each individual case;
2. Attempting to force a tenant out without filing for eviction by cutting off water and electricity to the rental unit (this is also a violation of the Ejectment of Residential Tenants Act);
3. Renting a property that you only have an option to purchase; and
4. Attempting to collect money you are not entitled to, or using means prohibited by the North Carolina Debt Collections Act.
Hopefully if you are smart enough to read this article you would not even think of doing anything that would violate numbers 2 and 3 above. These should be big red flags.
With respect to paragraph 4, you need to be familiar with at least the North Carolina Debt Collection Practice Act, N.C.G.S. 42-46 (which regulates the amount of late fees and court appearance fees), and your lease.
Paragraph number 1, regarding habitability issues, is a little more tricky and will require that you are familiar with N.C.G.S. 42-42 (which addresses a landlord’s responsibility to provide fit premises), your lease, any other local, federal, or state regulations that may apply to your rental unit, and most importantly common sense.
What if you didn’t mean to do anything wrong?
Unfortunately, the answer is: Too Bad. The North Carolina courts have held that the intent of the defendant is irrelevant, even if he is acting in good faith.
Ok, so we know what the act is, why is it so scary?
The UDTPA provides for mandatory recovery of treble damages if the court finds a violation of the statute. Additionally, if facts also support recovery for punitive damages, the plaintiff may allege both, but the recovery is limited to one or the other. Further, the court may award reasonable attorney’s fees to the attorney representing the prevailing party when the losing party willfully engaged in the unfair practice, and there was an unwarranted refusal by such party to fully resolve the matter which constitutes the basis of such suit.
If you have any questions or comments feel free to post or send me an e-mail.
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